Historical Context: Alabama Department of Revenue

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The Historical Context for the Alabama Department of Revenue has been posted from the Records Disposition Authority (RDA) approved by the State Records Commission on October 27, 2021. The RDA establishes disposition requirements by designating records as either temporary records which may be destroyed after a specified retention period, or permanent records, which must be preserved in perpetuity. The complete RDAs for close to 175 agencies can be found on the Alabama Department of Archives and History website.

Archaeologists unearthed the earliest taxation records, which date from approximately 6000 BCE, from the site of the ancient city-state Lagash (located in modern-day Iraq). Remnants that survive from ancient civilizations in Babylonia (modern-day Iraq and Syria), Persia (modern-day Iran), and China reflect the collection of poll taxes, tolls, duty fees, property taxes, and consumer taxes.[1]One of the most famous examples of ancient taxation comes from the Rosetta Stone, produced by the Egyptian Ptolemaic Dynasty and inscribed with three identical texts in Egyptian hieroglyphics, Greek, and Demotic script. This monument, a decree announcing tax reductions, provided the key to understanding hieroglyphics.[2] The revenues generated through these taxes allowed these ancient governments to provide essential services such as food, housing, infrastructure, and defense.

When studying United States history, American schoolchildren learn the rallying cry “no taxation without representation,” pronounced by American colonists in objection to taxes levied by the British Parliament. In 1776, the Declaration of Independence listed “imposing taxes on [the colonists] without… consent” as one of the colonists’ chief grievances with Britain. After the United States gained independence, its Articles of Confederation reserved to the states all authority to impose taxes.[3]As a result, the national government’s ability to pay its expenses depended on transfers of revenue from the states. In 1789, one year after the states ratified the United States Constitution, the new federal government created the Department of the Treasury and gave it responsibility for imposing and collecting taxes on commercial imports and goods.[4]

In 1862, Congress established the first federal income tax to help fund the American Civil War. President Abraham Lincoln created a new division within the United States Department of the Treasury, the Bureau of Internal Revenue, to manage tax collections. The mounting national debt caused by the war forced the federal government to generate new revenue streams. Besides taxing income, Congress also taxed alcohol and foreign goods. Two years later, Congress passed its first tax rate increase.[5] Politicians intended these measures to serve as temporary revenue streams. When the Civil War ended, Congress allowed the income tax laws to expire, but the Bureau of Internal Revenue remained intact.[6]

During the late nineteenth and early twentieth century, the American government greatly expanded its foreign and domestic roles. The government needed additional tax revenues to forge an international trading network and to introduce new domestic programs regulating commerce, education, and labor. Consumption taxes had traditionally served as the American government’s primary revenue source, but working-class Americans and labor organizers now believed that this tax structure limited the tax burden on corporations at the expense of everyday workers.[7] National labor leaders urged Congress to replace the existing consumption taxes with a standardized income tax.

Congress established an income tax law in 1894, but the United States Supreme Court ruled the law unconstitutional the following year. Undeterred, progressive politicians proposed a constitutional amendment granting the federal government the power to collect income tax. After several years of debate, Congress passed an income tax resolution in 1909. Alabama’s congressional delegation supported the income tax bill, and Alabama would become the first state to ratify the proposed 16th Amendment to the United States Constitution. After the requisite number of states ratified the 16th Amendment in 1913, Congress acted immediately to pass a nationwide individual income tax.[8] The 16th Amendment transitioned the U.S. from having a modestly funded central government dependent on consumption taxes and import tariffs to having a robust modern government that used income taxes to build a global military, create new national transportation networks, and expand vital government services.     

Perhaps unsurprisingly, the collection of tax revenues is as critical to the workings of U.S. state governments as it is to the operation of the federal government. In Alabama, the 1819 Constitution created the office of Comptroller of Public Accounts to administer tax collections. A slave tax was among several statewide taxes collected in Alabama. Each year, enslavers paid the state a tax for each Black enslaved laborer owned. Prior to emancipation, this was a significant source of state revenues.[9]

During the drafting of Alabama’s 1868 Constitution, convention delegates sought to create a more robust state government that funded transportation improvements and public schools. The framers determined that the State Auditor should be responsible for managing tax collections. In 1899, state legislators created the State Tax Commissioner office under the State Auditor’s administration.[10]

During the early twentieth century, the Alabama Legislature reorganized the state’s tax collection office on several occasions. In 1907, the newly formed State Tax Commission, a subdivision of the State Board of Assessors, assumed responsibility for the program.[11]In 1915, legislators consolidated the State Tax Commission’s office and duties under the control of the newly created Alabama State Board of Equalization.[12]The Board of Equalization sought to increase the collection of tax revenues statewide without raising the existing tax rates to help fund Alabama’s expanding government programs. The Board successfully collected additional revenues and helped modernize the state government. 

The 1901 Constitution empowered the state government to collect property taxes but did not address the collection of individual income or corporate taxes.[13]In 1919, recognizing that taxes would be most efficiently collected by a state agency wholly dedicated to that purpose, the Legislature re-established the State Tax Commission as an independent agency.[14]The State Tax Commission oversaw a broader tax collections program that included corporate taxes and motor vehicle license and tag fees.

The General Revenue Act of 1919 also proposed a new system of state income taxes. Individual incomes would be subject to an annual two to four percent tax rate.[15] Before the income tax could be implemented, however, the Alabama Supreme Court ruled that legislators had violated the 1901 Constitution.[16]The 1901 Constitution’s Section 214 stipulated that “The Legislature shall not have the power to levy in any one year a greater rate of taxation than [0.65 percent] on the value of the taxable property within this state.” The Alabama Supreme Court ruled that income tax rates could not exceed property tax rates.[17]At this time, legislators abandoned income tax efforts, as a 0.65 percent income tax would be insufficient to cover the state’s rising expenses.  

More than a decade passed before Alabama adopted a state income tax.[18] The start of the Great Depression left Alabama with substantial budget deficits; at a specially called legislative session in 1932, Governor Benjamin M. Miller reported that “the current debts of Alabama are approximately Twenty Million Dollars.” One of the largest deficits stemmed from approximately fifteen million dollars’ worth of appropriations which the Legislature had previously promised, but never delivered, to Alabama educational institutions. The massive shortfall threatened school closures. As corporations went bankrupt, property values plummeted, and sales revenues declined, the Alabama Legislature turned to income taxes to balance the state’s finances. 

In 1931 and 1932, the Legislature authorized an amendment to the 1901 Constitution that would permit the collection of income tax; however, when these amendments were put to the vote of Alabama citizens at the next election, both were soundly defeated.[19]Alabama voters finally approved the 25th Amendment to the 1901 Constitution in 1933, and income tax was collected for the first time in that same year. The Amendment enabled Alabama to collect income taxes that were capped at a rate of 5 percent per annum. Meanwhile, corporate income tax rates were capped at 3 percent. The creation of state individual and corporate income taxes dramatically increased Alabama’s annual budget. 

To manage the increasing flow of tax revenues, the Legislature passed the General Revenue Act of 1935. The bill formed a new Alabama Department of Revenue to replace the existing State Tax Commission. After a brief transition period, the Alabama Department of Revenue began operations in 1939.[20] 

Taxation is and remains a top concern for state agencies, elected officials, and members of the general public. Over time, the Alabama Department of Revenue has begun collecting new tax types and discontinued other tax collections, reflecting changes in state and federal laws, budgetary needs, and larger socioeconomic changes. For instance, the Legislature created privilege taxes on dog racing (in 1988) and on business licensing (in 1999).[21]The Department suspended collecting estate taxes in 2005 following the passage of the federal Economic Growth and Tax Relief Reconciliation Act of 2001. While the federal government would later reinstitute estate tax collections, the State of Alabama has not followed suit. Similarly, Alabama Act 2014-331 allowed the Department to cease collecting taxes when the cost of collecting a tax exceeds the revenues it generates, leading to the discontinuation of the playing card tax.

The Alabama Department of Revenue has increasingly embraced technological advances over the last two decades. The Legislature first allowed the Department to accept electronically filed tax returns with the passage of Act 1997-493. In 2021, millions of Alabamians use the My Alabama Taxes portal to submit their various tax returns. These technological advances have also led to new revenue streams for the state. The Department began collecting sales and use taxes for online purchases made in Alabama in 2018, following the United States Supreme Court’s ruling in South Dakota v. Wayfair, Inc. that vendors could be subject to state-level taxation even if they had no brick-and-mortar facilities within that state. Sales and use tax collections on online purchases aided the state in weathering economic downturns as a result of the COVID-19 pandemic of the early 2020s.

Since its inception, the Alabama Department of Revenue has collected various tax types including, but not limited to, individual income tax, business income tax, sales and use taxes, property tax, and privilege and license taxes.[22]  The Department is empowered to inspect the records of any individual residing or any business operating in Alabama. Revenue officials can file charges against individuals or businesses who fail to comply with state tax laws.[23] The Department can also seize property or assets of non-compliant persons or businesses.[24] More information on some the Alabama Department of Revenue’s specific duties is provided below.

State Land Commissioner

One of the Commissioner of Revenue’s responsibilities is to serve as the State Land Commissioner. This role predates the creation of the Alabama Department of Revenue, dating back to the passage of Alabama Act 1899-749. The Act created the position of a statewide Land Agent, under the supervision of the Governor, who examined the sale and disposition of state lands. In the same session, the Legislature decreed that the Office of State Auditor would oversee each land agent in each county to “look after, protect from trespassers, and rent any real estate bid in by the State at tax sale.”[25]The State Auditor’s Office absorbed the responsibilities of the land agent in 1915.[26] Nearly two decades later, Alabama Act 1932-104 transferred the administration of lands sold to the state for unpaid taxes from the State Auditor to the State Tax Commission. The same act assigned other state land responsibilities not related to taxation to the State Commission of Forestry, a precursor to the Alabama Department of Conservation and Natural Resources. In 1935, the Legislature created the position of State Land Commissioner and delegated the role to a member of the State Tax Commission. The State Land Commissioner and their authorized agents, in addition to the duties first established in Alabama Act 1899-749, were authorized to “investigate sales of real estate for taxes bid in by the State, notify the parties at interest in such real estate or sales…and perform any and all duties relating to lands bid in by the State at tax sales.”[27] When the Legislature created the Alabama Department of Revenue in 1939, the Commissioner of Revenue took over the State Land Commissioner’s former responsibilities.[28]

Motor Vehicle Registration

Alabama first required vehicle registration with the passage of Act 1911-452, which empowered the Secretary of State to facilitate applications for registration, maintain records about motor vehicle ownership, and collect license taxes. The General Revenue Act of 1919 reassigned this responsibility to the reconstituted State Tax Commission, the predecessor of the Alabama Department of Revenue. The horsepower of the vehicle’s engine determined the registration fee, ranging from $11.25 for a vehicle with less than twenty-five horsepower to $30 for a vehicle with more than forty horsepower.[29] The General Revenue Act of 1935 reaffirmed this responsibility and assigned it to the new Alabama Department of Revenue upon its advent in 1939.[30] Today, the Department is responsible for the registration and titling of motor vehicles in accordance with state and federal regulations. The Department also facilitates the production of specialized vanity license plates, including those whose proceeds benefit state colleges and universities, non-profit organizations, or other causes.

[1] Richard Henry Carlson, “A Brief History of Property Tax”, September 1, 2004, https://www.iaao.org/uploads/a_brief_history_of_property_tax.pdf.

[2] A History of the World in 100 Objects. Episode 33. “Rosetta Stone.” Produced by the British Broadcasting Corporation. May 19, 2010. http://www.bbc.co/uk/ahistoryoftheworld/objects/awwjbloORUaQXm9LmiTz8A.

[3] United States Articles of Confederation, Article VIII.

[4]Internal Revenue Service, “IRS History Timeline,” November 7, 2012, https://www.irs.gov/irs-history-timeline.

[5]Sarah Pruitt, “Why We Pay Taxes,” August 29, 2018, https://www.history.com/news/why-we-pay-taxes#:~:text=The%20history%20of%20income%20taxes,flat%20rate%20federal%20income%20tax.

[6] Sarah Pruitt, “Why We Pay Taxes,” August 29, 2018, https://www.history.com/news/why-we-pay-taxes#:~:text=The%20history%20of%20income%20taxes,flat%20rate%20federal%20income%20tax.

[7]Consumption taxes are taxes levied on the purchase, or consumption, or a good or service.

[8]Internal Revenue Service, “IRS History Timeline.”

[9]Brian Lyman, “A Permanent Wound: How the Slave Tax Warped Alabama Finances,” Montgomery Advertiser, February 4, 2017.

[10]Alabama Act 1899-679.

[11] Alabama Act 1907-337.

[12] Alabama Act 1915-464.

[13] Alabama Constitution of 1901, Article XI, Section 211

[14]Alabama Act 1919-328.

[15] Alabama Act 191-328, Section 316.

[16]Eliasberg Bros. Mercantile Co. vs. Grimes, 204 Ala. 492 (Alabama Supreme Court, April 24, 1920). 

[17]Eliasberg Bros. Mercantile Co. vs. Grimes, 204 Ala. 492 (Alabama Supreme Court, April 24, 1920

[18] Keith D. Malone, Kathy Lewis-Adler, and Joseph Joiner, “The Alabama Tax System: Origins and Current Issues,” International Journal of Humanities and Social Science vol 1, no. 14 (2011), http://www.ijhssnet.com/journals/Vol_1_No_14_October_2011/1.pdf.

[19]Alabama Act 1931-744; Alabama Act 1932-2.

[20] Alabama Act 1935-194.

[21] Alabama Act 1988-952; Alabama Act 1999-665.

[22] Privilege taxes apply to those who receive a certain privilege from the government. For example, a business might be required to pay privilege tax in order to operate within a locality. Privilege taxes differ from income taxes, which apply to a certain percentage of an individual’s or business’s income.

[23] Code of Alabama 1975 § 40-2-11.

[24]Code of Alabama 1975 Title 40 Section 5.

[25]Alabama Act 1899-454, Section 2.

[26] Alabama Act 1915-76.

[27] Alabama Act 1935-194.

[28] Alabama Act 1939-6.

[29]Alabama Act 1919-328. It should be noted that the average horsepower of motor vehicles in 2021 is between one hundred and eighty and two hundred horsepower.

[30]Alabama Act 1935-194.

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