AEFA 2020 Prebate Made Easy

02/09/20

The AEFA protects ALL Alabama citizens from taxes on the essentials of life through a Family Consumption Allowance (FCA).  This allowance is received by heads of household on or before the 1st of each month as a monthly rebate of the tax on life’s essentials.  It is simply the equivalent of the income tax standard deduction received monthly rather than as long as a year after it was accrued.   It also removes the marriage penalty experienced with the income tax.  The FCA is based on US Dept. of Health & Human Services poverty guidelines.  To be eligible, each recipient (head of household and dependents) must be a legal U.S. citizen AND a legal Alabama resident with verifiable SSN's to receive the rebate.  It is calculated on family size, NOT income.  It is simply the HHS Poverty Level times the tax rate divided by twelve. 

The attached charts show the Prebate guidelines and several charts depicting the current income and sales tax rates vs. the effective AEFA rate based on money spent, not wages earned.  The area above the blue curve shows the effect of removing the current system.  From $0 to poverty level spending, the Prebate covers taxes at the register.  From the poverty level through the desired spending level during a year, the effective tax rate paid is the percentage resulting from the following set of formulae:

Decide your spending level (S) for the year, then multiply it by 8.55%.  Subtract the yearly Prebate (P) for your family size in the Schedule to determine your tax (T).

      (S * 0.0855) – P = T

Here is the equation to determine your Effective Tax Rate (ETR):

      (T/ S) * 100 = ETR%

For a single person, if spending is 1.5 times the poverty level of $12,760 with a yearly Prebate of $1,091 the effective rate would be:

      ($19,140 * 0.0855) - $1,091 = $545.49

      ($545.47/$19,140) *100 = 2.85%

What is learned from this exercise?  Looking at the Effective Rate charts, notice that spending at each poverty level can be illustrated and compared to the current system.  Spending from $0 to the Poverty Level is tax free as a result of receiving the monthly Prebate on or before the 1st of each month.  1.5 times the poverty level yields a 2.85% effective rate, not 8.55%.  Twice the poverty level yields an effective rate of 4.28%.  Four times poverty level spending, 6.41%.  Eight times poverty level spending, 7.48%. And so forth across the spending level.  Notice also the level of spending required to reach the full 8.55% consumption tax rate on spending for each poverty level is over 128 times that level.

Of importance here is to realize that this single rate consumption tax with its associated prebate totally replaces the current income tax and sales tax system.  This calculation exercise illustrates the fairness of the AEFA.  Also remember, the AEFA collects the same amount of revenue at a 8.55% consumption rate while being collected only on new goods and services purchased at retail sales for personal use.  The rate is calculated to replace all the state income taxes, and state and local sales taxes currently collected.  It is revenue neutral because the tax base increases from approximately 2.3 million Alabama income tax filers to over 4.9 million residents plus everyone spending money while passing through the state.  Remember that only legal Alabama residents are eligible for the rebate, so non-residents, illegal aliens, etc., do not qualify.

Finally, there is a Prebate Made Easy chart  for this calculation illustrating spending by a single person, and two adults with two dependents.


AEFA Prebate Made Easy 2020