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May 21, 2013
Alabama Should Take This Chance at Improving Its Tax System

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This article originally appeared in the May 14, 2013 edition of State Tax Today.

by David Brunori

Summary by Tax Analysts®

Tax Analysts deputy publisher David Brunori says the Alabama Legislature should seize the opportunity to establish an independent tax tribunal by passing HB 264.

The Alabama Legislature is running out of time to make a significant, positive change to its tax system. Legislation (HB 264) to establish an independent tax tribunal has passed the House and is pending in the Senate. Currently, all disputes between taxpayers and the Department of Revenue are heard by an administrative law judge who works for the DOR. Lawmakers should move to fix this very flawed system of justice.

Possibly the most critical aspect of sound tax administration is a fair and efficient tax appeals system. The state must have a process to ensure its tax determinations are correct, unbiased, and equitably administered. Only an independent tax court or tribunal can do that. Moreover, taxpayers must be able to resolve disputes with the DOR before additional tax, interest, and penalties are imposed. These are not only the hallmarks of good tax administration, they represent good government.

The government should provide a prepay, independent tribunal. Without one, citizens face real or perceived biases. The ALJs, who almost always have spent most or all of their careers in the DOR, are tax collectors at heart. Even the perception of bias shakes to its core citizen confidence in a tax system like Alabama's, in which the referee is on the payroll of one of the teams.

Alabama, like many other states, faces myriad tax problems that it cannot easily fix. But every academic who has studied the issue, as well as the American Bar Association, has concluded that a prepay independent tax tribunal will make the system better. Moreover, 28 states have created independent tribunals to hear tax cases. No one in Alabama has made a credible argument against an independent tax appeals system. And the arguments proffered are often soaked in cynicism. DORs still employing ALJs defend their use mainly because those departments benefit from the system.

To be sure, there will be costs. The state is likely to lose or be forced to settle more cases. The DOR may be less aggressive without a sympathetic ear resolving disputes. But those are the costs of a free and fair society. The current appeals system will always be perceived as corrupt. The department's ALJ, Bill Thompson, is by all accounts a fair and thoughtful jurist. But all taxpayers see is a man with a conflict of interest.

Enacting HB 264 would lead to perhaps the most significant improvement the Alabama tax system has ever seen. The Legislature should seize this opportunity.

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