PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA

A Revenue Comparison for the City of Montgomery 

 Versus Selected Other Alabama Cities 

March 31, 2010 

 At the request of the Montgomery Area Chamber of Commerce, the Public Affairs 

Research Council of Alabama has analyzed in detail the revenues of the City of Montgomery 

as they compare to the revenues of the cities of Auburn, Birmingham, Huntsville, Mobile, and 

Prattville. These comparisons have been chosen purposefully for the following two reasons. 

 1. Montgomery is the third largest city in Alabama, and like Birmingham, Huntsville, 

and Mobile it is the central city of a large metropolitan area. The service demands in these 

highly urbanized cities are greater than those in the smaller cities of the state, and it is 

appropriate to compare the revenue streams that support municipal government in each of 

them. 

 2. Auburn and Prattville are smaller municipalities, but each is connected to 

Montgomery by proximity and commuting patterns. Because many people who work in 

Montgomery have chosen to live in Auburn or Prattville, these smaller cities in some respects 

are “bedroom” communities for Montgomery. This relationship makes it appropriate to 

compare their revenue details with Montgomery’s, even though the service demands of 

suburban cities are quite different from those of a metropolitan central city. 

 This study thus benchmarks the revenue system of the City of Montgomery against five 

cities divided into two subgroups: one composed of the three other metropolitan central cities 

that are functionally similar to Montgomery (Birmingham, Huntsville, and Mobile) and the 

other composed of two cities that are competitively linked to Montgomery as residential 

choices within the River Region (Auburn and Prattville). 

 Our comparisons are based on revenue measures developed by PARCA staff in 

municipal finance research work over the past twenty years. Regularly during these years, 

PARCA has compared the finances of every Alabama city over 20,000 population. In the 

process, we have developed methods for comparing city finances that we believe result in 

“apples-to-apples” comparisons. Our data are based on city financial reports, with adjustments 

made so that, to the extent possible, every city is treated the same in the various categories of 

revenue and expenditure. We work with city finance directors continually to improve the 

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 1
methods and to ensure that the adjustments are made accurately. Our purpose is to report the 

numbers objectively and fairly so that every community can evaluate its comparative position 

accurately and make whatever improvements its people feel are appropriate. 

For this special report, we have used data from the fiscal 2008 annual financial reports 

that have become available in recent months, supplemented by information provided on request 

by the various city finance directors. We also have included information on current tax rates in 

all of these cities that we believe will be useful for your consideration. 

PARCA studies include revenues that cities place in “governmental” funds, which are 

the funds normally budgeted by city councils -- the general fund as well as special revenue, 

debt service, and capital project funds. We exclude revenue in “enterprise” funds except for 

transfers to governmental funds. Thus, if a city transfers revenue from a sewer utility or a golf 

course to the general city budget, we count that transfer; but we do not include all of the sewer 

revenue and expenditure in our totals. In part this separation is dictated by the different 

accounting methods for these two types of funds. The results of our studies are presented in 

per-capita terms, so that a city of 200,000 can be compared directly with another city that has 

only 20,000 residents. 

In this report, we look at four issues that should be of interest to policy makers in 

Montgomery: 

• First, we look at the revenue totals for all of the cities in the comparison. How does 

Montgomery compare in terms of revenues available to provide municipal services, as well 

as tax rates and other features of its revenue system? 

• Second, we look at each of the major sources of revenue in the cities compared. How 

does Montgomery compare in its use of each source? 

• Third, we look at combined city, county, and school tax rates for each tax source. 

These are the rates that are most important to the taxpayer. Suppose a city's property tax 

rate is low, but the property tax rates for the county and school system are high. In such a 

situation, the city would have less room to adjust its tax rate than a city-to-city comparison 

alone would indicate. 

• Finally, we look at the percentage of revenues derived from the four major revenue 

sources. This gives a picture of revenue balance that complements the rate comparisons 

and enables us to see possible options for change in better perspective. The report ends 

with some observations drawn from the information presented. 

An Overview of City Revenues 

The chart below shows how the City of Montgomery compares to the five other cities 

in terms of governmental revenue per capita. These figures show total governmental revenues 

for fiscal year 2008, adjusted to remove school millages in some cases (as explained later in the 

report), and divided by the Census estimate of the number of residents in the city. The percapita revenues that result from this division allow us to compare the cities regardless of their 

size. The chart shows Montgomery in red, other central cities in blue, and suburban cities in 

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 2
$1,195

$1,080

$895

$1,869

$1,515

$1,330

Birmingham

Huntsville

Mobile

Montgomery

Auburn

Prattville

$0 $500 $1,000 $1,500 $2,000

Revenue Per Capita

Adjusted City Governmental Revenue, FY 2008

orange. This allows us to compare Montgomery against all five cities and also against the two 

types of benchmarks in the comparison group. 

 Montgomery’s city government operates on less revenue per resident than any of the 

other central cities compared. Service demands in Montgomery are likely to be similar to 

those in Huntsville, Mobile, and Birmingham, given the similar populations and urban status of 

the three cities; but in FY 2008 Mobile had 11% more revenue per resident, Huntsville 27% 

more, and Birmingham 56% more, on an adjusted basis. 

 The two suburban cities in the comparison likely have lower levels of service demand 

than the central cities, and thus can be expected to show lower levels of revenues for municipal 

purposes. Auburn’s revenues, adjusted for school millages contained in the city financial 

statements, were 10% lower than Montgomery’s, and Prattville’s were about 25% lower. 

To put these numbers in perspective, a difference of $100 in per-capita revenue equals 

$20 million in total revenues for a city of 200,000 people. Using this yardstick, the annual 

revenue advantage of the three other central cities over Montgomery is about $135,000,000 for 

Birmingham, $64,000,000 for Huntsville, and $27,000,000 for Mobile. 

 Assuming that the four cities spend their money in comparable ways, these revenue 

advantages mean that the other three central cities are financially capable of providing more 

and better services to their citizens. This of course does not mean that they actually do so. But 

the fact that Montgomery is on the low end of the revenue invested in running Alabama’s big 

metropolitan cities may indicate that it is a struggle to provide the resources needed to finance 

adequate services. 

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 3
 On the other hand, comparisons with the two nearby suburban cities indicate that 

Montgomery faces stiff competition in its own geographical area to keep service costs down. 

The City of Auburn operates on governmental revenues that would be about $23 million lower 

than Montgomery if the two cities were the same size, and Prattville operates at a level that 

would be $60 million lower using the same assumption. While the service demands for police 

and fire protection, roads, and other services are far greater in Montgomery and other central 

cities than in a suburban environment, it is often difficult for taxpayers to see beyond a straight 

comparison of their revenue burdens versus those in other nearby cities. 

 The overall revenue situation shown in the chart on the previous page thus indicates a 

double-bind: as a central city, Montgomery has very limited revenue availability, raising 

questions about adequacy in financing services; but its competition with local suburban cities 

creates constraints on its ability to raise revenues. 

Obviously the next question is, what accounts for these differences? The following 

sections look at how the six cities compare in terms of revenue raised from particular sources: 

• Sales and excise taxes. We have broken these down into five types – general sales 

and use taxes, rental/lease taxes, lodging taxes, gasoline taxes, and tobacco taxes. 

• Property tax.

• Occupational tax. 

• Business licenses. 

• Intergovernmental revenues. These consist largely of federal grants, shared state 

taxes, and utility transfers.

• Fees, permits, and fines. 

• Interest and miscellaneous revenues. 

General Sales and Use Taxes 

 General sales and use taxes are the major revenue source for most Alabama cities, 

typically applied at a rate of three to four percent and producing about forty percent of all 

governmental revenues. These figures do not include excise taxes on gasoline, tobacco, 

alcoholic beverages, rentals, and lodging, which are normally levied separately. The chart and 

table below show how Montgomery compares with the other cities on general sales tax 

revenue. 

The chart shows that Mobile, Huntsville, and Birmingham collect substantially more 

revenue from the general sales tax than Montgomery, while Prattville and Auburn collect less. 

This pattern reflects the double-bind mentioned above. Table 1 provides some explanation for 

the differences in revenue collections, by comparing the cities on four related measures: 

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 4
$463

$405

$375

$735

$722

$570

Mobile

Huntsville

Birmingham

Montgomery

Prattville

Auburn

$0 $200 $400 $600 $800

Revenue Per Capita

City General Sales Tax Revenue, FY 2008

• The percentage of each city’s revenue that is derived from the general sales 

tax. Mobile is more heavily dependent on the sales tax (55% of revenue) than any 

other major city in Alabama except Dothan. Birmingham and Auburn, on the other 

hand, have occupational taxes that raise substantial amounts of money; the general sales 

tax raises only a third of adjusted revenue in these cities, which is well below the 

average. Montgomery’s 39% is typical for Alabama cities. 

• The growth rate for general sales tax revenue. Montgomery’s 58% sales tax 

growth rate from 2000 to 2008 was higher than the increase for this source in the other 

central cities compared, but lower than sales-tax growth rates in Prattville and Auburn. 

• The sales tax rate. Mobile and Birmingham have high municipal sales tax rates of 

4%, followed by Montgomery and Huntsville at 3.5%. Prattville has the lowest city 

sales tax rate, at 2.5%, and Auburn is at 3%. 

The tax rate and revenue growth comparisons indicate that Prattville and Auburn have a 

dual advantage over Montgomery: lower tax rates and higher rates of revenue increase. 

Among the central cities, Montgomery compares well in that it has a relatively low tax rate and 

higher revenue growth over time. 

• The sales tax base. Huntsville was able to raise $206 per capita for each percent of 

the general sales tax rate, indicating that it has the largest sales tax base among these 

four cities. Mobile was not far behind, at $184; and Prattville ranked third, at $162. 

Montgomery's sales tax base was well below these, at $132 per capita per percent of tax 

rate. 

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 5
PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 6

The general sales tax rate commonly does not apply to all kinds of purchases, and 

differences in the detailed rates on particular kinds of transactions may explain some of th

variation in revenue collections per percent of general t

e 

ax rate. Table 1-A provides more 

details of the sales tax rate structure in these six cities. 

ales at 

l 

ontgomery. 

hus, competition from the neighboring cities is a factor to be considered. 

Prattville 2.50% 0.50% 0.50% 0.75% 2.50%

• Details of sales tax rates. Auto purchases are significant components of the sales 

tax base. Mobile, Birmingham, and Huntsville all tax auto purchases at 50% of the rate 

applied to general sales; for example, Mobile taxes auto sales at 2% and general s

4%. Montgomery has an auto tax rate that is only 36% of the general rate for al

purchases (1.25% versus 3.50%). The deeper discount for autos contributes to 

Montgomery’s low ranking on revenue per percent, per capita in Table 1. However, 

Auburn and Prattville both apply even lower sales tax rates to autos than M

T

TABLE 1-A DETAILED SALES TAX RATES

General Auto Farm Mfg. Vending

Tax Tax Tax Machine Tax

City Rate Rate Rate Tax Rate Rate

Mobile 4.00% 2.00% 2.00% 2.00% 4.00%

Birmingham 4.00% 2.00% 2.00% 2.00% 4.00%

Huntsville 3.50% 1.75% 3.50% 0.00% 3.50%

Montgomery 3.50% 1.25% 1.25% 1.75% 3.50%

Auburn 3.00% 1.10% 1.50% 1.50% 2.19%

TABLE 1 GENERAL SALES TAX REVENUE

2008 Tax Percent Percent Tax 2008 Revenue

Revenue of 2008 Increase Rate Per Percent

City Per Capita Revenue '00-'08 2008 Per Capita

Mobile $ 55% 30% 4.00% 184 735 $ 

Huntsville 722 48% 55% 3.50% 206

Birmingham 570 30% 25% 4.00% 142

Montgomery 463 39% 58% 3.50% 132

Prattville 405 45% 64% 2.50% 162

Auburn 375 35% 73% 3.00% 125
PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 7

Rental/Lease Taxes 

 Rental/lease taxes are sales taxes on the rental or lease of tangible personal pro

Alabama typically such taxes are add-ons that are enacted and reported separately from the 

general sales tax. All five of the cities compared with Montgomery in this study had 

rental/lease taxes in FY 2008, as shown in the chart below. Birmingham collected $25 per 

capita from this source; Mobile was not far behind, and Huntsville also had sizeable 

perty. In 

rental/lease revenues. Auburn and Prattville raised much lower amounts from this source. 

Montgom

e, accounting for its giant increase). Mobile and Montgomery have the highest general 

tax rates, at 4%, a point higher than Birmingham and Huntsville; the suburban cities are at 

e 

Montgomery estimated its rental/lease tax revenue for 2009 at $1.8 million for nine months of 

ery enacted a rental/lease tax in 2009, a year later than these comparisons. 

Table 2 provides detailed measures for rental/lease taxes, and for comparative purposes 

we have added Montgomery to the bottom of the table by showing its 2009 rates. For 

Birmingham and Mobile, this tax accounted for about 1.5% of city revenue in FY 2008, but for 

the other cities it raised only about 1% of adjusted revenues. Percentage increases were very 

small for the central cities but very large in the two suburban cities (Auburn repealed the tax

for a tim

2.5%. 

Auto rentals/leases are an important part of this tax base, and the tax rate is often 

discounted for this type of transaction. The table shows auto tax rates. In Mobile, auto rentals 

and leases are taxed at the full 4%; Birmingham has a very low 0.75% rate due to competitiv

pressures in its metropolitan area. Montgomery and Huntsville are at 1.5%, while the suburban

cities have somewhat lower rates on autos. The last column of the table shows the revenue 

raised from the rental/lease tax for each percent of the general tax rate. The City of 

$0

$10

$7

$25

$23

$17

Birmingham

Mobile

Huntsville

Auburn

Prattville

Montgomery

$0 $5 $10 $15 $20 $25 $30

Revenue Per Capita

City Rental/Lease Tax Revenue, FY 2008
PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 8

collections, which amounts to about $3 per percent, per capita. Once fully in place, this tax 

should yield from $4 to $5 per percent, per capita, based on the data from comparable cities in 

is table. 

odging Taxes 

th

L

, 

nmental units. 

The FY 2008 revenue yields for lodging taxes are shown in the chart below. 

All of the cities in the comparison have local lodging tax revenue except Birmingham

which by ordinance has allocated all of its lodging tax revenue to other gover

Table 3 provides detailed measures for lodging taxes in these cities. The tax raises 2-

4% of adjusted city revenue, with Prattville and Auburn being on the high end of this range. 

Prattville and Auburn have shown the highest increases in revenue, but Montgomery has seen 

$0

$27

$37

$27

$45

$34

Mobile

Prattville

Huntsville

Auburn

Montgomery

Birmingham

$0 $10 $20 $30 $40 $50

Revenue Per Capita

City Lodging Tax Revenue, FY 2008

TABLE 2 RENTAL/LEASE TAX REVENUE

2008 Tax Percent Percent General Auto Linens 2008 Rev.

Revenue of 2008 Increase Tax Tax Tax Per Percent

City Per Capita Revenue '00-'08 Rate Rate Rate Per Capita

Birmingham 25 $ 1.4% -18% 3.00% 0.75% 3.00% 8.42 $ 

Mobile 1.7% -33% 4.00% 4.00% 4.00% 5.80 23 

Huntsville 1.1% 16% 3.00% 1.50% 3.00% 5.56 17 

Auburn 0.9% 899% 2.50% 1.25% 2.50% 3.84 10 

Prattville 0.8% 172% 2.50% 1.00% 2.50% 2.82 7 

Montgomery* --- --- --- 4.00% * 1.50% * 4.00% * ---

*2009 rates
PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 9

the most growth among the central cities in this comparison. Montgomery and Prattville hav

the highest tax rates (8.5%), with Mobile not far behind. Mobile and Huntsville raise about 

$5.60 per capita, per percent of tax rate; Huntsville’s high ranking may be due in part to the 

fact that it has created a surcharge of $1.00 per room-night that adds to the rate shown in the 

table. Auburn and Montgomery are significantly lower on

the highest tax rates (8.5%), with Mobile not far behind. Mobile and Huntsville raise about 

$5.60 per capita, per percent of tax rate; Huntsville’s high ranking may be due in part to the 

fact that it has created a surcharge of $1.00 per room-night that adds to the rate shown in the 

table. Auburn and Montgomery are significantly lower on

e 

 the revenue raised per percent of tax 

rate, which is a rough measure of the size of the tax base. 

Gasoline Taxes 

 All of the cities in the comparison have local gasoline taxes except for Birmingham

where there is a countywide gasoline tax of one penny per gallon shared among the local 

governments in the county. The FY 2008 data for gasoline taxes are shown in the chart below. 

Prattville and Mobile raised $27 per capita from this source, follow

, 

ed closely by Montgomery. 

Auburn and Huntsville received much less from the gasoline tax. 

$0

$26

$27

$9

$27

$6

Prattville

Mobile

Montgomery

Auburn

Huntsville

Birmingham

$0 $5 $10 $15 $20 $25 $30

City Gasoline Tax Revenue, FY 2008

Revenue Per Capita

TABLE 3 LODGING TAX REVENUE

2008 Tax Percent Percent Tax 2008 Revenue

Revenue of 2008 Increase Rate Per Percent

City Per Capita Revenue '00-'08 2008 Per Capita

Mobile $ 3.4% 11% 8.00% 5.63 45 $ 

Prattville 37 4.0% 176% 8.50% 4.30 

Huntsville 34 2.2% 56% 6.00% 5.59 

Auburn 27 4.1% 288% 7.00% 3.81 

Montgomery 27 2.3% 111% 8.50% 3.22 

Birmingham --- --- --- 3.00% ---
TABLE 4 GASOLINE TAX REVENUE

2008 Tax Percent Percent Tax 2008 Revenue

Revenue of 2008 Increase Rate Per Penny

City Per Capita Revenue '00-'08 2008 Per Capita

Prattville $ 3.0% 0% 0.04 27 $ $ 6.73

Mobile 27 2.0% 4% 0.04 6.64

Montgomery 26 2.2% -4% 0.04 6.51

Auburn 9 0.8% 14% 0.02 4.43

Huntsville 6 0.4% 24% 0.01 6.07

Birmingham --- --- --- --- --- 

 

 Table 4 shows that this revenue source accounts for around 2-3% of adjusted city 

revenue in Montgomery, Prattville, and Mobile, but less than 1% in the other cities compared. 

Mobile and Montgomery levied the highest municipal tax rates on gasoline among the cities 

shown, at four cents per gallon. Prattville, Mobile, and Montgomery all collected revenue in 

the $6.50 range, per penny, per capita. Huntsville and Auburn likely suffer locational 

disadvantages, since they are located “off the beaten path” to some degree. However, they did 

show the highest of the anemic growth rates for this source. 

Tobacco Taxes 

All of the cities in this comparison have tobacco taxes except Birmingham. Jefferson 

County has a countywide tobacco tax that is shared by local governments. While local taxes 

may be levied on all tobacco products, the rates are normally compared on the basis of a pack 

of twenty cigarettes, which is what we have done. The FY 2008 data for the six cities are 

shown in the chart below. Mobile raises by far the most revenue from this source, at $14 per 

$0

$8

$4

$2

$14

$8

Mobile

Montgomery

Huntsville

Prattville

Auburn

Birmingham

$0 $4 $8 $12 $16

Revenue Per Capita

City Tobacco Tax Revenue, FY 2008

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 10
capita. Montgomery and Huntsville are a distant second, at $8 per capita. Prattville and 

Auburn raise far less. 

Table 5 provides details for this tax source. Tobacco taxes generate one percent or less 

of adjusted revenues in all of the cities compared, and revenue growth rates are generally small 

or nonexistent except where rate increases have occurred. Mobile has the highest tobacco tax 

rate, followed by Montgomery and Huntsville in double digits. Prattville and Auburn have 

much lower tax rates, and Auburn’s tax applies only to cigarettes. The tax raises from 67 to 92 

cents per capita for each penny of tax rate in the cities with broad-based coverage of tobacco 

products. 

TABLE 5 TOBACCO TAX REVENUE

2008 Tax Percent Percent Tax 2008 Revenue

Revenue of 2008 Increase Rate Per Penny

City Per Capita Revenue '00-'08 2008 Per Capita

Mobile $ 1.0% 249% 0.15 14 $ $ 0.92

Montgomery 0.7% 477% 0.12 8 0.67

Huntsville 0.5% 371% 0.10 8 0.77

Prattville 0.5% -26% 0.05 4 0.84

Auburn 0.1% -18% 0.04 2 0.38

Birmingham --- --- --- ---

Property Taxes 

Property taxes are traditionally a mainstay for local governments, but few Alabama 

cities rely heavily on this source. The chart below shows the revenue yield for these six cities 

from the property tax. Financial reports for Auburn, Huntsville, and Birmingham include 

property tax revenue for schools as well as the city government, and the chart shows an 

estimated breakout of the two types of revenue. With the adjustment to remove school 

millages, Montgomery ranks third among the six cities in property tax revenue per capita for 

city purposes, ahead of Auburn, Prattville, and Mobile. 

The amounts adjusted out of city revenues in this chart also have been extracted from 

the comparisons in other parts of the report for the three cities affected. The school millages 

deducted were levied as city taxes, and for that reason are included in the city financial 

statements; they do not constitute all the property tax revenue for the schools, only the part that 

happens to be routed through the city’s accounts. This property tax revenue is irrelevant to our 

comparison, and it gives only a partial picture of school revenues as well. Removing these 

revenues gives a more accurate comparison of the property taxes used for city purposes. 

Table 6 contains detailed measures for the property tax revenue source. Looking at the 

“City Tax Mills” column, we see that Birmingham has the highest property tax rate for city 

purposes, and that Huntsville, Montgomery, and Auburn are relatively close to each other in 

property tax support for the city budget. Prattville and Mobile have lower property tax rates. 

Montgomery’s revenue yield of $12 per capita, per mill of tax rate is typical of the group. 

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 11
$149

$186

$0

$116

$70

$36

$98

$0

$238

$195

$69

Birmingham

Huntsville

Montgomery

Auburn

Prattville

Mobile

$0 $100 $200 $300

Revenue Per Capita

School

City Property Tax Revenue, FY 2008

TABLE 6 PROPERTY TAX REVENUE

2008 Tax Percent Percent City School 2008 Revenue

Revenue of 2008 Increase Tax Tax Per Mill

City Per Capita* Revenue '00-'08 Mills Mills Per Capita

Birmingham 238 $ 13% 66% 18.7 2.8 13 $ 

Huntsville 195 13% 108% 13.0 6.5 15

Montgomery 149 12% 57% 12.5 - 12

Auburn 116 11% 127% 10.0 16.0 12 

Prattville 70 8% 87% 7.0 - 10

Mobile 69 5% 20% 8.0 - 9

*Adjusted for school millages

Occupational Taxes 

Among Alabama’s large cities, six have occupational license taxes that mainly are 

levied on payroll income (Birmingham, Bessemer, Mountain Brook, Auburn, Opelika, and 

Gadsden). The tax rates range from 0.5% in Mountain Brook to 2% in Gadsden, with a 1% 

rate being most common. A local legislative act prohibits such a tax for the City of 

Montgomery (Act 457 of 1957), and Montgomery County is prohibited from levying an 

occupational tax by a separate legislative act (Act 89 of 1975). An attempt to use the county’s 

school taxing authority to levy such a tax was voided by the Alabama Supreme Court in recent 

years, and House Bill 49 in the current legislative session proposes a vote on a constitutional 

amendment to prohibit occupational taxes in Autauga, Elmore, and Montgomery counties. 

These legal considerations, and the sentiments they reflect, pose a stiff challenge to the 

adoption of an occupational tax in Montgomery. 

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 12
 Two of the cities in this comparison have occupational taxes, as shown in the chart 

below. For both Birmingham and Auburn, the occupational tax is a major source of revenue. 

Table 7 provides detailed measures for the occupational tax in the two cities. Each has a 1% 

tax rate, which raised $336 per capita in Birmingham and $146 per capita in Auburn during FY 

2008. An occupational tax of 1% in Montgomery would raise about $30 million a year if its 

yield were equal to that in Auburn. It would be more likely to raise a larger amount, given the 

higher employment base of the capital city; at $240 per capita, per percent of tax rate (the 

average of the Auburn and Birmingham tax yields), an occupational tax of 1% in Montgomery 

would raise over $48 million per year. A “unit yield” of $300 per capita (near Birmingham’s 

level) would raise about $60 million per year. 

$146

Birmingham $336

Auburn

Huntsville

Mobile

Montgomery

Prattville

$0 $100 $200 $300 $400

Revenue Per Capita

City Occupational Tax Revenue, FY 2008

TABLE 7 OCCUPATIONAL TAX REVENUE

2008 Tax Percent Percent Tax 2008 Revenue

Revenue of 2008 Increase Rate Per Percent

City Per Capita Revenue '00-'08 2008 Per Capita

Birmingham 336 $ 18% 39% 1.00% 336 $ 

Auburn 146 13% 76% 1.00% 146 

Huntsville --- --- --- --- ---

Mobile --- --- --- --- ---

Montgomery --- --- --- --- ---

Prattville --- --- --- --- ---

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 13
Business License Taxes 

 Business licenses are a major revenue source for most Alabama cities, often raising 

about the same amount of revenue as property taxes. The rates for business licenses are 

complex, may vary by type of business, and often are categorized differently from city to city. 

Thus the tax rates cannot be summarized in the same way as the taxes discussed above, and our 

best measure of the tax burden is simply the amount of money raised per capita. The FY 2008 

data for the comparison cities are shown in the chart below. 

$133

$104

$182

$350

$197

$106

Birmingham

Mobile

Montgomery

Prattville

Huntsville

Auburn

$0 $100 $200 $300 $400

Revenue Per Capita

City Business License Revenue, FY 2008

 Montgomery’s business license revenue ranked third among the comparison group, but 

the revenue per capita was close to that in Mobile. Birmingham collects far more from this 

source than the other cities in the comparison. Huntsville’s revenues are low for a central city, 

but this probably is due to the particular features of its economy that restrict the tax base. The 

only way to know with certainty how much these data are affected by the business-license rate 

structure, and how much by the size of the business-license tax base, is to compare the business 

license rate schedules directly by type of business. 

 Table 8 presents the details for business license revenues. Business license revenue 

represents 19% of Birmingham’s revenue total, and 15% of revenues in Mobile, Montgomery, 

and Prattville. It is a much smaller percentage of revenue in Auburn and Huntsville. 

Montgomery’s 51% increase in business license revenue from 2000 to 2008 was higher than in 

Mobile and Huntsville, but lower than in Birmingham, where these revenues doubled over the 

period. 

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 14
TABLE 8 BUSINESS LICENSE REVENUE

'08 Rev. Percent Percent

Per of 2008 Increase

City Capita Revenue '00-'08

Birmingham 350 $ 19% 107%

Mobile 197 15% 44%

Montgomery 182 15% 51%

Prattville 133 15% 81%

Huntsville 106 7% 43%

Auburn 104 10% 32%

Intergovernmental and Utility Revenues 

 Cities collect intergovernmental revenues from federal and other grants, payments in 

lieu of taxes, shared taxes that are levied at the state or county level, and utility transfers from 

locally-owned utilities. Federal grants, state gasoline tax revenue, and transfers from utilities 

and other local enterprises are commonly the major factors in this revenue category. Because 

some federal grants are project-specific, there can be large changes of a positive or negative 

direction in intergovernmental revenue from year to year. The FY 2008 data for the cities in 

this study are shown in the chart below. 

$14

$115

$60

$46

$136 $100

$194

$119

Huntsville

Birmingham

Montgomery

Mobile

Auburn

Prattville

$0 $50 $100 $150 $200 $250

Revenue Per Capita

Intergovermental Utility

City Intergovernmental & Utility Revenue, FY 2008

Huntsville received the largest amounts in FY 2008 from these two sources combined. 

While the intergovernmental revenue amounts for Huntsville, Montgomery, and Mobile were 

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 15
similar, Huntsville received major amounts in transfers from its utilities. Birmingham received 

the largest amounts from intergovernmental sources, due not only to federal grants but also to 

the large amounts of countywide tax-sharing mandated by local acts governing tobacco and 

gasoline taxes. Auburn and Prattville received only about half as much revenue from these 

sources as the four central cities. 

TABLE 9 INTERGOVERNMENTAL REVENUE

'08 Rev. Percent Percent

Per of 2008 Increase

City Capita Revenue '00-'08

Huntsville 236 $ 16% 47%

Birmingham 194 10% 29%

Montgomery 129 11% 47%

Mobile 119 9% 45%

Auburn 65 6% 207%

Prattville 50 6% 5%

Fees, Permits, and Fines 

 Cities collect fees and permit revenues from a number of persons and businesses, and 

they collect fines from violations of city ordinances. The chart below shows the revenue 

derived from these sources in FY 2008 (the data exclude business license tax revenues, which 

have been discussed already). Auburn received the largest amounts from these sources. 

$110 $50

$23

$17

$168

$114

$20

$20

$26

$135

$73

$30

Auburn

Montgomery

Huntsville

Prattville

Birmingham

Mobile

$0 $50 $100 $150 $200 $250

Revenue Per Capita

Fees Fines

City Fees, Permits, & Fines Revenue, FY 2008

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 16
Montgomery ranked second, due mainly to its large revenues from fines, which were double 

those in the other cities. Fee and permit revenues vary in part due to a city’s policies on how to 

pay for garbage pickup. Some cities finance this service in whole or in part through general 

fund revenues, while others charge a garbage fee to cover all or part of the service. Mobile, 

which has no garbage fee, ranked last in this comparison because of that policy. 

Interest and Miscellaneous Revenues 

Cities receive interest on their cash deposits and collect miscellaneous revenues from a 

number of small sources. The chart below shows the amounts received from these sources in 

FY 2008. Birmingham ranked first. It has a sinking fund for capital project financing that is 

funded by an earmarked property tax; this fund normally maintains large cash balances and 

produces large interest earnings. Montgomery ranked second on these revenue sources. 

Prattville ranked last, due to very low interest earnings. 

$19 $31

$14

$25

$22

$7

$28

$24

$22

$34

$16

$14

Birmingham

Montgomery

Mobile

Huntsville

Auburn

Prattville

$0 $10 $20 $30 $40 $50 $60 $70

Revenue Per Capita

Interest Misc.

City Interest and Miscellaneous Revenue, FY 2008

Overall Local Tax Rates 

 It is important to consider all local tax rates, not just those for municipalities. A 

taxpayer in the City of Montgomery is likely to care more about overall tax rates than about the 

separate tax rates for the city, county, and school system. If the overall rate of a particular tax 

is high in Montgomery County, it will be hard to raise the city's tax rate even though it may be 

below that for other cities. The table below shows how Montgomery compares on overall local 

tax rates, including city, county, and school taxes. State taxes apply equally in every 

community and are ignored in the comparison.

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 The comparisons by tax reveal the following competitive positions for taxpayers in the 

City of Montgomery: 

• Montgomery and Birmingham are highest in overall local sales tax rates for general 

transactions, at 6%; the competitive gap with Prattville and Auburn is two percentage 

points. On auto sales, Montgomery’s 1.583% overall rate is lowest among the “Big 

Four” but is marginally higher than Prattville and Auburn. 

• Montgomery ranks second to Mobile in overall local rental/lease tax rates for general 

transactions, at 4%. On auto rentals/leases, Montgomery’s 1.5% overall rate is third 

among the “Big Four” cities but is marginally higher than Prattville and Auburn. 

• Montgomery’s overall local tax rate of 8.5% on lodgings ranks third among the “Big 

Four” cities (behind Birmingham and Mobile), and there is no competitive gap with the 

neighboring cities. 

• Montgomery’s overall local rate on gasoline ($0.05 per gallon) ranks second to Mobile 

but is equal to Prattville. There is a gap of three cents between Montgomery and 

Auburn. 

• Montgomery ranks third on overall local tobacco taxes ($0.12 per pack) and is 

substantially higher than both Prattville and Auburn. 

• Montgomery is far below every other city compared, except Prattville, on local 

property tax rates (30 mills). 

•

• Like three of the five cities in the comparison, Montgomery has no local occupational 

taxes. 

Reliance on Major Tax Sources 

All of the cities in this comparison derive most of their revenue from four major tax 

bases -- sales, property, income, and business licenses. Table 11 shows the percent of adjusted 

governmental revenue derived from these four big sources in each city. Montgomery and 

Huntsville rely least on these sources, at 72% of total revenue; the other four cities derive 

three-fourths or more of revenues from them. These reliance data, in conjunction with the rate 

TABLE 10 OVERALL LOCAL TAX RATES

Sales Sales Rental/ Rental/ OccupaTax Tax Lease Lease Lodging Gasoline Tobacco Property tional

City General Auto General Auto Tax Tax Tax Tax Tax

Montgomery 6.0% 1.583% 4.0% 1.50% 8.5% 0.05 $ 0.12 $ 30.0 ---

Birmingham 6.0% 2.750% 3.0% 0.75% 10.0% 0.01 0.04 63.0 1.0%

Mobile 5.0% 2.500% 5.0% 5.00% 10.0% 0.06 0.35 57.0 --- 

Huntsville 4.0% 2.000% 3.5% 1.75% 8.0% 0.04 0.13 51.5 --- 

Prattville 4.0% 1.100% 2.5% 1.00% 8.5% 0.05 0.05 24.5 --- 

Auburn 4.0% 1.350% 2.5% 1.25% 9.0% 0.02 0.04 47.5 1.0%
comparisons in Table 10, provide a good sense of any revenue options that might be available 

to Montgomery. 

Each of these categories of taxes has its advantages and disadvantages. Experts often 

recommend a balanced tax system in order to avoid over-dependence on one source, improve 

fairness, and maintain competitiveness. Any analysis of options for the City of Montgomery 

should take note of such considerations. The following sections examine the reliance of this 

comparison group on major tax sources. 

TABLE 11 RELIANCE ON MAJOR TAX BASES

Sales & Business OccupaExcise Property License tional SubCity Taxes Taxes Taxes Tax total

Mobile 63% 5% 15% --- 84%

Birmingham 32% 13% 19% 18% 81%

Prattville 54% 8% 15% --- 76%

Auburn 41% 11% 10% 13% 75%

Huntsville 52% 13% 7% --- 72%

Montgomery 44% 12% 15% --- 72%

Sales and excise taxes. All of the cities in the comparison rely more heavily on sales 

and excise taxes than on any other source of revenue. About 44% of Montgomery's revenue 

comes from general sales, lodging, gasoline, and tobacco taxes; with implementation of the 

rental/lease tax, this total should increase by about one percentage point in the future. 

Table 12 shows the percent of revenue derived from the various types of sales and 

excise taxes in each city. Montgomery ranks fourth, drawing a smaller percentage of its 

revenue from these taxes than do Mobile, Prattville, and Huntsville. Birmingham and Auburn 

rely much less on sales and excise taxes, primarily because they have occupational taxes. 

Referring back to Table 10, we can see that Montgomery's sales and excise tax rates 

typically are in the middle of the “Big Four” cities, but are generally higher than in Auburn and 

Prattville. 

Sales and excise taxes have certain advantages for cities. They are strongly tied to 

economic activity, and in a growing economy they generate increasing revenues. They can be 

levied by ordinance, without voter approval. They take effect quickly, and are relatively easy 

to administer. For many transactions, they place little burden on the purchaser and therefore 

are relatively invisible to taxpayers. 

However, sales and excise taxes also have disadvantages. The revenue growth they 

produce is cyclical, rising and falling with the economy, which can create budgetary problems. 

Sales taxes tend to be "regressive," creating a larger burden on low-income consumers, who 

spend more of their income on items normally included in the sales tax base. They also are 

burdensome on high-value transactions such as autos, where the amount of the tax becomes 

PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 19
substantial. When sales tax rates become too high, economic activity tends to move to where 

the rates are lower. 

TABLE 12 RELIANCE ON SALES & EXCISE TAXES

General Lodging Rental/ Gasoline Tobacco Sales &

Sales Tax Lease Tax Tax Excise

City Tax Tax Taxes

Mobile 55% 3.4% 1.7% 2.0% 1.0% 63%

Prattville 45% 4.0% 0.8% 3.0% 0.5% 54%

Huntsville 48% 2.2% 1.1% 0.4% 0.5% 52%

Montgomery 39% 2.3% --- 2.2% 0.7% 44%

Auburn 35% 4.1% 0.9% 0.8% 0.1% 41%

Birmingham 30% --- 1.4% --- --- 32%

While Table 12 shows Montgomery with below-average reliance on sales and excise 

taxes, opportunities to increase these taxes in Montgomery are limited by the rate comparisons 

shown in Table 10. Montgomery’s overall sales tax rate is high. Its reduced sales and 

rental/lease rates for auto transactions are generous in percentage terms, but the actual rates on 

these transactions are higher than in the two neighboring cities. The lodging tax has a 

relatively high rate in the Montgomery “neighborhood,” but is low in comparison with 

Birmingham and Mobile; the data in Table 3 indicate that an increase of 1% in the lodging tax 

rate would raise about $650,000 per year. There will be some natural growth in revenue from 

the rental/lease tax, which should provide $1 million or more each year above the current-year 

revenue estimate as it comes fully online, based on the values from other cities shown in Table 

2. 

Property taxes. Montgomery depends on the property tax for only 12% of its revenue, 

as shown in Table 11. This is not atypical in percentage terms, but it represents a typical share 

of a relatively small revenue base. Combined local property tax rates in Montgomery are far 

below those in the other major metropolitan areas of Alabama, as shown in Table 10. 

 The property tax has certain advantages. It is a stable producer of revenue, since 

property values are less subject to economic fluctuation than sales or income. It is a tax that 

draws from all kinds of taxpayers, both individuals and businesses. Sometimes it is claimed 

that renters pay no property tax, but it seems clear that the renter shares the burden of the tax 

with the landlord even though the latter actually pays the bill. The property tax is particularly 

suited to municipal services and schools, since high-quality services of these types tend to 

benefit property values and make the tax payment an investment for the taxpayer. 

 On the other hand, the property tax has disadvantages. It is more difficult to enact, 

because of the three-step process required by the Alabama constitution. Any property tax 

proposal would have to be approved by the City Council, the State Legislature, and the voters. 

The tax is slow to take effect once adopted, since it is assessed and collected only once each 

year. And there are fairness considerations, since different kinds of property are taxed at 

different ratios to market value. 

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PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA 21

Montgomery's low percentage of dependence on the property tax and its low property 

tax rates make it appropriate for the City to consider additional property taxes, which would 

improve tax balance without hurting competitiveness except with respect to Prattville. The 

property tax is particularly appropriate for municipal and school services, where the investment 

of the tax revenue should lead to improvements in property value. The data in Table 6 indicate 

that each additional mill of property tax in the City of Montgomery would raise about 

$2,400,000 per year in revenue. 

Occupational (or income) taxes. An occupational tax is technically a license tax 

levied on the employer and measured by payroll income; in effect, however, it is much like a 

local income tax. Like most cities in Alabama, Montgomery has no occupational tax. In terms 

of balance, then, the City raises none of its revenue from its personal income base. 

Birmingham and Auburn, the two cities in this comparison with occupational taxes, raise 13-

18% of revenues from this source, which enables them to reduce dependence on sales and 

excise taxes. 

Occupational taxes have several advantages, particularly for metropolitan central cities 

like Montgomery. They are based on personal income, which is the tax base that is most 

responsive to economic growth. They are relatively easy to administer, since employers have 

experience with payroll taxes. They are levied on the income of all individuals who work in 

the city, regardless of residence. Large central cities have high percentages of commuters who 

use the services and facilities of the city government, and this tax allows the city to obtain a 

contribution for those services. 

An occupational tax can be levied by city ordinance except where a local legislative act 

or constitutional amendment prohibits it. As discussed above on page 12, there are significant 

legal barriers of this type in Montgomery, and these undoubtedly reflect sentiment that is 

opposed to such a tax. 

Because income-related taxes are responsive to economic conditions, there is some risk 

of fluctuations with economic conditions. However, experience in Birmingham and Jefferson 

County suggest that the tax is relatively stable in its growth from year to year. This should be 

true in Montgomery as well, since the state and federal government payrolls are affected 

relatively little by annual economic fluctuations. Fairness issues can arise from the definitions 

of income, particularly in deciding how to treat non-salary income. Fairness issues also can 

arise if the tax rate is too high, since that would mean that non-residents pay to the city more 

than is reasonable in terms of the services received. 

In terms of tax balance and particularly of requiring all who benefit from city services 

to share in their financing, it is appropriate for the City of Montgomery to consider adopting an 

occupational tax, assuming its legality. The common rate of 1% seems to be a reasonable 

starting point for such consideration. Since Montgomery has no occupational tax, we cannot 

be certain how much this type of tax would yield. The yields seen by Birmingham and Auburn 

probably provide an upper and lower limit for a rough estimate. This suggests that a 1% 

occupational tax in Montgomery might raise between $30,000,000 and $60,000,000 per year, 

which would amount to $150 to $300 per capita. An occupational tax of 0.5% would raise half 

this amount, and so on.