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Grocery tax cut could be less costly to state than first thought, new data suggests

MONTGOMERY, Ala. — One month into Alabama’s reduced tax on groceries, new data suggests the cut may turn out to be less costly to the state’s coffers than initially thought.

Looking at tax receipts for the month of October, the newly formed Study Commission on Grocery Taxation on Tuesday met to explore ways to eventually eliminate the state’s tax on groceries entirely, while also not leaving a gaping hole in the state education budget that’s funded in part through sales tax revenue.

In June, Alabama lawmakers overwhelmingly voted to reduce the state’s sales tax on groceries from 4% to 3%, which went into effect in September. The legislation allows for another 1 percentage point decrease in fall 2024 if revenue growth in the Education Trust Fund is expected to be 3.5% or more in 2025 over 2024. 

Advocates for eliminating or reducing the state’s tax on groceries gather in April outside the Alabama State House in Montgomery.

With fresh new data in hand from the Alabama Department of Revenue, Legislative Fiscal Officer Kirk Fulford presented to the study commission how the new tax cut was impacting state revenue one month in.

According to the data, ETF revenue for the month of October was about $462.3 million, $238.8 million of which came from gross sales taxes. Of the $238.8 million, $25.4 million came from the state’s new 3% tax on groceries.

According to Fulford, that $25.4 million in state grocery tax revenue meant that the single-cent reduction in sales tax resulted in an $8.46 million monthly loss to the ETF, not the originally predicted $12.7 million loss.

“If the real number is $8.5 million, then there’s a big difference in what we thought going in versus what actual numbers are showing,” Fulford said. 

“Again, that’s one month in, and you can’t jump too quickly to conclusions based on the one-month period, but it is something that we’re going to be watching on a month-to-month basis. So it may very well not be $152 million (a year) cost to lower the next one by 1%, it may be $110 million, it may be something significantly less, so we’re certainly going to pay attention to that.”

While the one-month data was limited in scope, members of the study commission voiced optimism at the prospect of further reducing the state’s tax on groceries, including Akeisha Anderson, advocacy director for Alabama Arise, an advocacy group for low-income Alabamians.

“Since the 1990s, Alabama Arise has been working to eliminate or reduce the state’s grocery tax,” Anderson said.

“The reason this issue is so important to us is because over the years, we have found that the grocery tax has been a tax on survival; it is what we refer to as a regressive tax, meaning that it impacts lower-income Alabamians more harshly than it impacts higher-income Alabamians.”

Anderson went on to offer a few proposals as to how the state could make up lost revenue to eventually eliminate the state’s tax on groceries entirely. 

Options the state could take, Anderson said, could be to tax professional services such as those from attorneys, physicians and accountants. Other options she named were eliminating the state’s federal income tax deduction, which Anderson described as a “tax loophole that mainly benefits the highest earners in the state of Alabama.”

Wade Payne, another study commission member who represents the Alabama Grocers Association, agreed with Anderson in that the state’s tax on groceries was a “regressive tax,” and that by his calculations, a family of four would save $576 a year on groceries were the tax eliminated entirely.

Wade Payne, representing the Alabama Grocers Association, speaks before the Study Commission on Grocery Taxation.

The director of retail operations for Food Giant and Foodland, Payne also manages a number of grocery stores, and said that based on the amount he’s seen shoppers save at his own stores throughout October, he believed that that money would more than likely be spent elsewhere, largely negating the loss of revenue to the ETF.

“Our company, we’re broken up into a lot of different corporations, but our largest corporation is made up of 18 stores, and I did look at their (October) report,” Payne said. 

“We collected $121,000 less in sales tax than we would have if it had still been (4%), so that’s $121,000 that went back to our customers. If they spent that out in the economy and are spending it on non-food, it was taxed, so I think that sales tax revenue will get replaced on its own.”

The study commission will meet again late next year, the study commission’s co-chair, Sen. Andrew Jones, R-Centre, said, after which members will have an entire fiscal year of new data to analyze. As to the state’s reduction from 3% to 2%, Jones said it was “not a question of if,” but “a question of when.”

“There’s a thought out there that when folks are spending less on grocery tax, they’ll spend that money on other items and the state will still have some tax benefits on that, so we want to really gauge the impact of what we’re doing,” he said.

In all, October revenues to the Education Trust Fund were down 13.8% compared to a year ago.


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