Tax receipts in the Alabama Education Trust Fund increased from October to November, but are still down more than 5.4% in the first two months of fiscal year 2025 when compared to a year ago.
The largest negative is in income tax collections, down 9.2% or about $88.7 million for the year.
House Education Budget Committee Chairman Rep. Danny Garrett, R-Trussville, said the revenue collections are not problematic. The ETF is on track to meet the obligation in the $9.3 billion 2025 education budget.
“Income tax collections were down, sales tax collections were up, so overall it was kind of a modest net decline,” Garrett said. “But nothing that I’m concerned about. We expected our revenue to flatten from where it’s been, and we budgeted accordingly. So it’s nothing alarming. I think you’ll see some fluctuations in income taxes.”
Income tax revenue is the largest contributor to the ETF, which supports public education. Gross individual income tax receipts were down 5% or $36.9 million in November compared to a year prior. Gross corporate income tax receipts decreased by $2.1 million.
At least some of the individual income tax revenue loss is due to lawmakers’ 2023 temporary exemption on the taxation of hourly workers’ overtime earnings. The tax cut, meant to let people keep and spend more of their wages, has cost the state more than originally expected. Estimates earlier this year put the cost at about $184 million, up from the earlier $34 million estimate. The average savings per taxpayer is expected to be about $56.
The exemption sunsets in mid-2025 and lawmakers will have to decide in the upcoming session if they’ll continue it. House Majority Leader Anthony Daniels, D-Huntsville, championed the original bill in 2023 and has said he’ll file a bill to extend the exemption beyond June 2025, 1819 News previously reported.
Sen. Arthur Orr, R-Decatur, chairman of the Senate education budget committee, said budget leaders are watching the income tax receipts and updated information is needed on the cost of the exemption and its usage.
“The numbers we had several months ago were way out of the realm of the original projections, so we need to get those updated,” Orr said.
Sales tax is the No. 2 contributor to the ETF. So far, sales tax revenue represents $380.4 million in the ETF, up 2.85%.
That increase is noteworthy because it’s been more than a year since the state took 1 cent off its sales tax on most grocery items, said Kirk Fulford, the deputy director of the Legislative Services Agency.
In the state General Fund, revenues are up 1.92% to $602.3 million in the first two months of the fiscal year. A notable decline, however, is in the interests on state deposits.
It was -17.8%, or $9.7 million, in November. That’s the first decline in more than two years for the revenue stream that’s been a major contributor to the General Fund’s growth, propped up by high interest rates and federal COVID-19 relief money waiting in state accounts to be spent. In fiscal 2024, interests on state deposits accounted for about $152 million of the General Fund’s $226 million growth.
“I expect this (downward) trend will continue throughout the year and our estimates have accounted for that,” Fulford told ADN.
“We have now seen two rate cuts by the Federal Reserve totaling 75 basis points. The Atlanta Federal Reserve’s EconomyNow app now puts the probability of an additional rate cut in December at 66%. Beyond that point, (Fed Chairman Jerome Powell) has recently stated they will take a more cautious approach to further rate cuts in 2025 than originally expected.
“Regardless, the cuts already approved will have a lingering impact on interest receipts for some time to come, especially when coupled with the expected reduction of invested fund balances due to the required expenditure of some of the federal funds.”