Two months into fiscal year 2026, growth in the state’s General Fund is up 6.2% from the same point in 2025, despite a decrease in one of its largest revenue sources.
Meanwhile, the combined tax receipts to the Education Trust Fund were nearly flat at .6% for October and November. Income tax revenue has increased so far this year as sales tax revenue has decreased.
Lawmakers and other state budget leaders are six weeks from the start of the 2026 legislative session. Any revenue declines will be top of mind as they craft the state’s 2027 spending plans.
General Fund
Interests in state deposits, fueled by an influx of COVID-19 federal relief funds and higher-than-normal interest rates, were a boon for the General Fund in 2023 and 2024 and held steady until a downturn at the end of fiscal 2025, still totaling $510 million that year. So far in 2026, it represents $84 million of the General Fund’s more than $639 million to date — second only to $144.3 million from insurance company licenses — but was down 12.9% in November and 1.78% for the year.
“As more ARPA money comes out of these accounts, we’ll start seeing some of that drop down,” House General Fund budget committee chairman Rep. Rex Reynolds, R-Hazel Green, told Alabama Daily News. “But based on other deposits and other revenue accounts, they may pop back up (occasionally).”
State leaders have been warned for more than a year that interest rates will decrease.
“This is yet another signal of why we have to be very conservative going into the 2027 budget cycle,” Reynolds said.
Reynolds notes increases in other significant General Fund sources that are, and will hopefully continue, to make up the difference if interests on state deposits continue to slide.
One of those is the Simplified Sellers Use Tax, better known as the online sales tax. It’s up 11.87% for the year to $59.6 million.
The distribution of the SSUT revenue is the source of an August lawsuit filed by the City of Tuscaloosa and others. They argue the formula created about a decade ago is unfair to larger municipalities because their populations do a significant amount of online shopping and too much of their tax dollars are going elsewhere, including to the state. They want a distribution system similar to that of in-store purchases.
The Association of County Commissions of Alabama has argued the constitutionality of the current structure and said that changing it now would be devastating to counties and beyond.
The Dale County Commission understands Alabama’s online use tax program is constitutionally sound and that any significant legislative changes to the program would jeopardize its essential revenue for everyday governmental services. https://t.co/O6Zjd5IUPo #ALpolitics pic.twitter.com/1EyLO6sbsE
— Alabama Counties (@AlabamaCounties) December 2, 2025
Some lawmakers have been sympathetic to cities and previously carried bills to tweak the structure or raise the online tax. Reynolds has previously met with city leaders and has been supportive of some sort of compromise, especially in scenarios where cities lose money on purchases made online for products picked up locally. He’s previously said he’d be in favor of a compromise that would keep more tax revenue where it originated.
Whether there will be legislation is still to be determined. Still, the fight is sure to seep into legislative discussions next year. Sen. Greg Albritton, chairman of the Senate General Fund budget committee, previously told ADN the SSUT revenue distribution plan was decided a decade ago in a laborious negotiation process among all parties. Attempts to change it now are “another money grab on the part of municipalities.”
“There’s always a possibility (for legislation), but I would think timing-wise, this may not be the year to do that,” Reynolds said this week. “Let this (lawsuit) play out.”
ETF
The declining gains in the ETF will “absolutely” mean cautious spending in 2027, Senate education budget committee chairman Sen. Arthur Orr said this week.
The decrease comes as budget leaders face several significant increases in 2027, including a potential $380 million shortfall in the state’s health insurance plan for educators.
Orr on Monday said the state would cover some of that increase, but the PEEHIP trust fund would need to “take on a substantial part of the retiree cost increase.”
“They need to take on more of the burden for the upcoming year,” he said.
The biggest revenue sources in the ETF are income and sales taxes, respectively. Income tax receipts were up by 7.29%, or $48.4 million, in November. Sales tax receipts were down 6% or $14.3 million.
In September, the state sales tax on most grocery items dropped 1 percentage point to 2%, the second cut in two years. The cut is expected to reduce revenue to the ETF by about $122 million per year.