What’s next for Alabama’s grocery tax? A ‘top priority’ or cautionary tale

Alabama might have approved what lawmakers described as a “historic” sales tax cut on groceries in 2023, but the state is still among 13 that continues to apply a tax at the supermarket check-out.

It will be a long, if not impossible, road to fully remove the sales tax from a grocery bill in Alabama.

But some lawmakers say they want to push ahead with a slow unraveling of the sales tax on groceries. In September 2023, the state’s tax rate on groceries dropped from 4 to 3 percent following legislative approvals. At the time, lawmakers vowed to cut it in half – from 4 percent to 2 percent.

The interest to do so among some lawmakers continues, renewing the likelihood that the grocery tax could become a major issue in Montgomery next spring.

“My whole philosophy on the get-go was that we had a consensus to take it down in half from 4 to 2 percent,” said state Sen. Andrew Young, R-Centre. “And then let’s see how the two cuts play out and then come back with a final bill to remove the final 2 cents.”

He added, “I would have never expected we would go another year without having that final penny coming off.”

Addressing concerns

Further complicating things is the restriction on cities to cut the tax. On average, the overall sales tax rate in Alabama – including state, county, and city rates – is over 9%.

In Hoover recently, where the overall sales tax rate is 9.5%, officials announced they would not be cutting the city’s portion of the sales tax on groceries from 3.5 to 3 percent.

The reasoning? Local officials say there is a provision in the 2023 state law that prevented them from lowering it a half-cent. Instead, they said, the state law requires them to cut it by 25%.

That provision, city officials have said, would have resulted in a sales tax cut from 3.5 to 2.625% — an amount that was too steep. Also, the city did not meet the 2% revenue growth projections in the General Fund to allow for the cut in the first place.

The issues surround the grocery tax are prompting lawmakers to consider a couple of issues:

• Removing language from the 2023 state law that places restrictions on how deep of a cut cities or counties can apply on the sales tax on groceries. Few of Alabama’s 464 cities have even entertained a cut to the sales tax on groceries, let alone pushed forward with a slight reduction in rates.
• Refining the language on what would trigger the next 1 percentage point reduction. According to the law, the second 1 percentage point reduce was supposed to take effect last month if the revenues in the state’s Education Trust Fund grew by 3-1/2% over the previous fiscal year. That did not occur. But Jones said that has “gross” receipts, and not “net” receipts, were utilized, “hitting that 3.5 percent might have been close.” The 1 percent reduction resulted in a drop of around $120 million in the ETF budget, or slightly less than that $150 million initial projections.
• Considering a complete elimination of the state sales tax on groceries. Some politicians support it, and Jones said it’s something the state should do. But education budget chairmen like Sen. Arthur Orr, R-Decatur and Rep. Danny Garrett, R-Trussville, are not certain the timing is good for a complete eradication.

“I think there are other things we could and should consider before we make a decision to go all-in on the grocery tax,” said Orr, chair of the Education Trust Fund. “If the motivation is to cut taxes, then we need to look at income taxes and other taxes and those need to be on the table as well.”

Related content: Alabama cities sound alarms over grocery tax cut

Bipartisan support continues

The elimination of the sales tax on groceries has support from left- and right-leaning organizations, namely the Alabama Arise and the Alabama Policy Institute.

The support also comes at a time when inflation is cooling, but prices on some grocery items – like meat and eggs — continues to increase.

“We’ve said all along that we are not sure that taking 1 percent off will make that much of a difference,” said Carol Gundlach, a policy analyst at Alabama Arise. “I think there are a number of places we could make some changes to Alabama’s tax structure so it both generates the revenue the state needs and is also less of a burden for ordinary, middle-income people.”

Justin Bogie, senior director of fiscal policy with the Alabama Policy Institute, questions why lawmakers are tying the future grocery sales tax reductions to growth in budgets “rather than understanding that reduced taxes promote greater individual freedom and economic growth, benefiting the state as a whole.”

Bogie also said the API supports the power of local governments to reduce the grocery tax – or any other taxes – as they deem most appropriate, whether it meets a revenue growth threshold or not.

“Any reduction in the local grocery tax rate will benefit citizens who have and continue to deal with rising food costs,” he said, adding that he supports legislative action to give cities more autonomy over tax decision making.

Garrett, chair of the House Ways and Means Education Budget Committee, said that Alabama’s entire tax structure remains one of the lowest per capita in the U.S., largely because property taxes are among the lowest in the country while overall sales taxes are among the highest.

A city’s ability to raise property taxes to compensate for lowered sales taxes would require a constitutional amendment, Garrett said.

“There has not been a serious discussion about that,” he said. “We have had several local (property) tax referendums in the past year, and they have all failed. That’s why our state is so dependent on income and sales taxes. Income is 65 percent of the Education Trust Fund revenues. Some states don’t have an income tax at all.”

Forging ahead

Alabama is one of a minority of states that continues to tax groceries and until last September, it was one of only three states – Mississippi and South Dakota being the others – to tax food at the fullest extent without offering credits or rebates for the poor.

In South Dakota, the issue has become the hottest campaign item this fall. Voters in that state will decide during next month’s election on a ballot initiative to remove the state’s 4.2% sales tax on anything for human consumption, except for prepared foods or alcoholic beverages.

Proponents argue that a tax on groceries is regressive and unfair. Opponents say the tax cut could force officials to implement an income tax. South Dakota, unlike Alabama, does not tax income.

Rick Weiland, co-founder of Dakotans for Health and a proponent of the initiative, said he’s been following the issue closely in Alabama, and he’s hopeful his state – through the ballot initiative – will join most of the states lessening the impact of the tax burden at the grocery store.

“It is estimated that low-income families spend upwards of 30% of their household income just to put food on the table,” Weiland said. “Taxing food is regressive, immoral and disproportionately effects people with modest incomes.”

Nathan Sanderson, executive director of the South Dakota Retailers Association, said his state will have to make up the lost revenue from a tax cut from somewhere else.

“The concept of a lower sales tax rate on groceries has been discussed many times over the last two decades and it has never garnered the support of a majority of South Dakotans because they know the money to fund essential government services is going to come from somewhere,” Sanderson said, noting that the money would come from either higher property taxes or through the implementation of an income tax.

Alabama doesn’t allow for citizen-backed initiatives during elections creating similar lively ballot debates over taxation.

Future cuts will have to come from lawmakers, and Jones is hopeful there is political and fiscal will to see the removal of the state sales tax on groceries.

“I believe it should be our top priority,” he said.

Read more: How a grocery tax cut will help Alabama’s aging, rural population

Orr, though, said lawmakers need to be mindful of the budget implications. He said that Alabama’s new overtime law exempting weekly hours worked over 40 from Alabama’s income tax, has proven to be considerably more expensive than initially projected. He also said there will be higher requests to support the Teachers’ Retirement System (TRS) and the Public Education Employees’ Health Insurance Plan (PEEHIP).

Orr said that lawmakers should also be mindful of downward cycles in the economy, something he said many of his colleagues haven’t experienced before.

“I would say 80 percent of the Legislature was not here in 2010, 2011, or 2012, after the Great Recession,” Orr said. “They have not gone through a significant downturn in the economy. It’s been an upward trajectory ever since, and they have not experienced a downward cycle.”

He added, “My counsel to my colleagues is that you better be careful because things could turn south quickly in the education budget because of income and sales taxes, which are economy related.”