MONTGOMERY, Ala. — The Alabama Legislature gave final approval Tuesday to legislation taking another penny off the state’s sales tax on groceries.
Assuming House Bill 386 is signed by Gov. Kay Ivey, the reduction to a 2% tax on most food items will take effect Sept. 1.
The bill’s passage was part of a rapid-fire day in the State House where other tax cut and incentive bills were passed. There are two days remaining in the 2025 legislative session.
“We’ve reduced the grocery tax now 50%,” bill sponsor Rep. Danny Garrett, R-Trussville, told reporters after the bill’s passage. “We’re still one of the few states that taxes groceries. We’re headed, I think, toward zero tax on groceries.”
In 2023, the Legislature passed a bill reducing the state sales tax on food from 4% to 3%. An additional one percentage point reduction to the grocery tax is possible if the Education Trust Fund grows by at least 3.5% in a year. That hasn’t yet happened, but HB386 allows the one percentage point reduction.
The bill is expected to save Alabamians about $122 million annually, money that otherwise would have gone to the state’s Education Trust Fund.
Eliminating tax on baby, feminine items
The Legislature also sent to Ivey a bill to remove the state’s 4% sales tax on baby care, feminine hygiene and maternity products.
House Bill 152, sponsored by Rep. Neil Rafferty, D-Birmingham, and Sen. Arthur Orr, R-Decatur, will reduce revenue to the Education Trust Fund by about $14 million per year. Both men had proposed the family friendly legislation in previous sessions. Tax-exempt items include diapers and baby formula.
“It’s a good bill for young families with children,” Orr told ADN after the bill’s passage. “And why are we taxing a product that 50% of the population has to use at a certain time in their lives? It’s common sense legislation and we finally got it done.”
Rural hospitals
And while not a tax cut, lawmakers hope Rep. Terri Collins’ House Bill 86 will benefit Alabamians in rural communities.
The bill creates a dollar-for-dollar tax incentive program for individuals and businesses that donate money to rural hospitals. It also received final passage Thursday and awaits the governor’s signature.
The Rural Hospital Investment Program would have an annual statewide cap of $20 million for 2026, $25 million for 2027, and $30 million for 2028 and beyond.
It was amended in the legislative process to require a 10% match from local communities. That match can be in the form of in-kind services, such as maintenance or landscaping work.
Collins has sponsored the bill for three sessions. The legislation creates a board to oversee the program and says hospitals must submit a written five-year plan that describes their financial viability and stability and detail how they would use donations. The tax credit will end in three years unless extended by lawmakers.
“I’m just hoping our truly rural hospitals can benefit from this,” Collins told ADN Tuesday evening.
Many of the state’s rural hospitals have struggled to remain afloat financially; some have shuttered services.
The Alabama Hospital Association celebrated the bill’s passage.
“This legislation represents a critical step forward in addressing the ongoing challenges faced by rural hospitals across our state,” Danne Howard, the association’s deputy director, told ADN.
“… The Rural Hospital Investment Program is not a standalone fix, but it is an important part of the broader solution to sustain and strengthen health care in Alabama’s rural communities.”
In the first year, a hospital could receive up to $750,000 through the new program.
The Senate also gave final approval to House Bill 379, which exempts remote workers from the state’s income tax under certain circumstances, including working in Alabama 30 or fewer days per year.
Other tax-cut bills now still pending in the Legislature’s final two voting days include:
House Bill 387, which previously dealt with municipalities, was then substituted to reduce the sales and use tax on machinery from 1.5% to 1.25%. Orr said that was an effort by Senate leadership to give a tax break to businesses.
House Bill 388 doubles the state’s income tax exemption from $6,000 to $12,000 for individuals 65 years old or older who withdraw funds from a defined contribution retirement plan such as a 401(k) or Individual Retirement Account. The reduction would be phased in by $2,000 per year over three years. It is expected to cost $45 million per year when fully implemented.
House Bill 389 focuses on tax relief for lower-income Alabamians. It would raise the standard deduction from $2,500 to $3,000 for individuals, and expand dependency exemptions beginning with the 2026 tax year.