The state sales tax on groceries would drop from 3% to 2% in September under a bill approved in a Senate committee on Wednesday, the largest of a four-bill tax cut package pending in the final days of the legislative session.
Sen. Arthur Orr, R-Decatur, chair of the Senate education budget committee, called the bills approved in the House in mid-March a “work in progress” and told committee members to bring potential amendments before the legislation reaches the Senate floor next week.
All four bills, sponsored by Rep. Danny Garrett, R-Trussville, were approved in committee Wednesday, some with significant changes.
House Bill 386 takes the sales tax on most grocery items down one percentage point. 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 happened yet, but Garrett’s bill triggers the next reduction. The expected cost to the state — and saving for Alabamians — is about $122 million per year. Sales tax revenue supports the state’s Education Trust Fund.
The bill was substituted in comment to add language from what was House Bill 387 to give local municipalities the authority to lower their local sales tax on groceries by resolution or ordinance and without legislative approval.
The revised bill was approved 14-1.
Sen. Sam Givhan, R-Huntsville, told Alabama Daily News later he voted no because the state needs to wait and see if the Trump administration is successful in his campaign pledge to take the federal income tax off of overtime pay. If that happens, the state would likely have to reinstate its tax cut on overtime earnings. And that, the state has learned, costs more than $300 million per year.
Legislation to extend beyond June the 2023 state tax break on overtime earnings has not advanced this session and is dead. That cut, widely supported when it passed, had a fiscal impact way above initial predictions. Though supporters say hourly workers likely put that money right back into the state’s economy by spending it.
Garrett has previously said the tax cut on groceries and his other proposals will benefit more people than the overtime exemption.
House Bill 387, which previously dealt with the 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.
Some Democrats questioned the significant change to the bill.
“How’d we go from groceries to machinery?” Sen. Bobby Singleton, D-Greensboro, said.
Orr said the substitution was allowed because both bills related to tax reductions.
Others questioned the fiscal impact, which Orr said would be about $11 million per year.
Sen. Vivian Figures, D-Mobile, said she was concerned about how machinery would be defined in the bill, to which Orr said, “Let’s keep talking (before the bill gets to the floor).”
The substituted bill passed along party lines, 11-4.
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. Orr amended the bill Wednesday to phase in the reduction by $2,000 per year over three years.
That cut is expected to cost $45 million per year when fully implemented.
It was approved 14-0.
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. It was unchanged in committee and approved 14-0.
The bills that were changed Wednesday in committee would need House approval again if they pass the Senate next week.
This story was updated to correct that the current sales and use tax on machinery is 1.5%.