Alabama commission looks at further grocery tax cuts, potential revenue replacement

by Jemma Stephenson, Alabama Reflector
November 15, 2023

Members of a state commission looking at the impact of grocery tax repeal looked at the recent cut to the tax, the potential for slower education budget growth, and alternate revenues. 

Alabama in September cut the state’s 4% tax on groceries to 3%, the first reduction in the tax since it was first implemented in 1939. Prior to the cut, Alabama was one of only three states that fully taxed groceries, driving some local levies as high as 10%. 

Cuts to the tax have been a long-term goal of anti-poverty groups, which said the tax affected food security and the ability of low-income Alabamians to feed children, as well as conservatives in favor of cutting taxes.

“It impacts lower income Alabamians more harshly than it impacts higher income Alabamians,” said commission member Akiesha Anderson, policy and advocacy director of Alabama Arise.

The bill froze but did not reduce local taxes on groceries.  If the Education Trust Fund (ETF) budget, where proceeds from the tax go, grows by  3.5% next year, the state tax will be cut to 2%.

“We’re all excited about that possibility coming sooner rather than later,” said Sen. Andrew Jones, R-Centre.

Kirk Fulford, deputy director of the fiscal division of the legislative services agency, said Tuesday that “later” seemed more likely. 

The director told the committee that he was not predicting growth in the ETF for Fiscal Year 2024.

“Just based on the first month, I mean, we’re in negative growth,” said Fulford after the meeting.

Publicly available information on the Education Trust Fund shows that income tax returns were lower in October than they were last October, the biggest drop in the Education Trust Fund. The Education Trust Fund is around $74.4 million lower than it was this time last year. About $54.7 million of that decrease is from income tax.

Fulford said to reporters after the meeting that there are four parts to the income tax. He said withholding, or taxes withheld from a paycheck, has kept up with Alabama’s low unemployment.

“The other components are what, first of all, jumped way up and then last year came right back down,” he said to reporters after the meeting.

Fulford said over email before the meeting that October 2022 receipts last year were up by $65 million, so this year could be a return to normalcy after several years of drastic increases.

Fulford said cutting local grocery taxes could affect local governments, who sometimes levy higher taxes on groceries than the state. 

“So there would be a bigger dollar figure impact at the local level if you eliminated all the groceries,” he said.

House Ways and Means Education Committee chair Danny Garrett, R-Trussville, said in October that he did not expect to cut the tax further in the next legislative session, which begins in February.

Commissioners brought up a number of different ways that revenues could be potentially restored to the Education Trust Fund. Anderson said she thinks that more tax dollars for education means better education. 

Alabama spends less on average than the national average on per pupil spending. According to the U.S. Census data released in May, Alabama spent $10,683 per student in fiscal year 2021, compared to a national average of $14,347.

One idea was taxing services after first being brought up by Anderson.

“I will point out that you are absolutely right; the economy and the world that we’re living in as a service economy, the state of Alabama, local governments don’t generally tax services on a broad scale, that may very well be something to look at to consider to investigate,” said Fulford.

Fulford and Rosemary Elebash, state director for the National Federation of Independent Businesses, said that it had been discussed in the 1990s and later under former Gov. Bob Riley, who was in office from 2003 to 2011. Elebash said there were concerns about that also being a regressive tax.

“They went so far as to tax haircuts, vet services, and people are unhappy when you start taxing their dogs and cats,” said Elebash about a previous attempt.

Anderson asked if there had been any thought about taxing professional services, such as attorneys, that might avoid the regressive structure. Fulford said that there had been an occupational tax issue in Jefferson County that led to multiple lawsuits.

“But there certainly has been an issue,” he said.

The Joint Study Commission was formed to study the grocery tax and will file a report in 2026 after annual meetings.

“Not to procrastinate, of course, but we got some time to get our homework done,” said Jones.

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