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Education revenues remain near flat; Grocery tax news expected next month

State tax revenues into the Education Trust Fund continue to be down slightly in fiscal year 2024, as state budget leaders prepare for the legislative session just one month away. 

Lawmakers will learn next month if receipts are expected to rally enough in 2025 to drop another penny from the state’s sales tax on groceries.

Total ETF revenues were down $25.3 million or 2.57% in December when compared to a year prior. In the first three months of fiscal year 2024, revenues were $2.4 billion, down $29.2 million or 1.19%.

Lawmakers and Gov. Kay Ivey shaved the tax on most store-bought food items from 4% to 3% this past fall. The legislation approved earlier in 2023 said the tax would be reduced to 2% in September 2024 “if the average of estimated growth” for total ETF revenues for fiscal year 2025 is at least 3.5% higher than fiscal 2024.

The two growth estimates come from state Finance Director Bill Poole and Legislative Fiscal Officer Kirk Fulford. Both will give presentations on the overall revenue picture during legislative budget hearings Feb. 5 and 6. The session begins Feb. 6.

A 1-cent cut on the sales tax on food was expected to save Alabamians an estimated $152 million per year. But that savings comes at a cost to the education budget. In the first three months, total sales tax revenue is down $22.5 million, or 4%.

The ETF’s current flatlined revenue isn’t a tremendous concern for budget leaders — they planned to spend less on education than expected revenues this year. The ETF collected a record $10.4 billion in 2023. For 2024, the education budget is $8.8 billion.

“December was a continuation of the slower growth of the last few months,” Fulford told Alabama Daily News. “There are always some year-end anomalies with income taxes, so nothing too alarming there although refund payments were up by $38.8 million and that contributed to the decline.”

Whether another penny comes off the tax will affect lawmakers’ budgeting, and other proposed tax cuts, for 2025.

“This is a step-by-step process and the loss of approximately $150 million in additional revenue will very much affect any tax cut or tax credit discussions in the 2024 regular session,” Sen. Arthur Orr, R-Decatur, told Alabama Daily News. He’s chairman of the Senate education budget committee.

Besides the sales tax, other declining revenues so far this year include income tax, down $13.1 million or .77%, and use tax, down $2.2 million or 3.7%.

Alabama is not alone in declining revenues or tax cuts in recent years. The Associated Press reported this week that some states are facing serious deficits as federal COVID-19 pandemic relief spending runs out. As a result, states are expected to pass fewer tax cuts during their 2024 legislation sessions.

A month from the start of Alabama’s session, there are some tax cut proposals circulating. Orr wants to remove state and local sales taxes from feminine hygiene products, baby wipes and diapers and other baby-care products. House Minority Leader Rep. Anthony Daniels, D-Huntsville, and Sen. Garlan Gudger, R-Cullman, are expected to again sponsor legislation to give a tax break to businesses that provide or help pay for employees’ child care.

Meanwhile, Ivey has signaled her support for education savings accounts that would let families take state education dollars to private schools or homeschool settings. One proposal would give parents about $7,000 per year, the same amount the state spends on average on public school students. Depending on the final proposal and how many students use it, it could divert hundreds of millions from the ETF.

“We’ll have to ferret through a lot of that information to sort out where we are,” Rep. Danny Garrett, R-Trussville, said about the upcoming legislative session and budget situation. He’s chairman of the House education budget committee.

“We’ve been disciplined, we haven’t spent all the revenue we’ve received and we’ll have to be very judicious and prudent going forward,” he said. 

In the General Fund, which supports non-education state agencies, revenues continue to grow over 2023, still largely propelled by earnings from high-interest rates, Fulford said. 

Though that’s not normal growth, Fulford said the General Fund is in great shape and doesn’t need further growth to support 2024 expenditures.

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