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State revenues: No growth in the ETF; General Fund gains still tied to interest rates

Revenue growth in Alabama’s General Fund is still being propelled by high interest rates and was up nearly 5.5% in May compared to May 2023 and nearly 9% for the fiscal year.

Meanwhile, revenues into the Education Trust Fund were up more than 18% in May, but that was an anomaly, Kirk Fulford, deputy director of the Legislative Services Agency, told Alabama Daily News on Monday. Overall, the ETF’s growth is flat this year at .2%.

“The 18% growth in the ETF was entirely due to individual income tax refund payments being down when compared to last May,” Fulford said. “The Department of Revenue has been processing returns and issuing refunds at a quicker pace this year than last. We had a couple of larger-than-normal refund months earlier this year because of that.”

Income and sales taxes are the largest sources of revenue for the ETF. As of the end of May, income tax revenues had risen .75% this year, totaling $4.65 billion. Sales tax revenue growth is -1.7% at $1.6 billion.

At least some slow down in growth was expected in the ETF, Sen. Arthur Orr, R-Decatur, said Monday, citing two tax cuts approved by lawmakers and Gov Kay Ivey in 2023. The state sales tax on most grocery items was reduced from 4% to 3% last fall. The 1-cent cut was expected to save Alabamians an estimated $152 million per year.

“You never like to see a decrease in sales tax revenues because it means fewer sales are occurring across the state,” Orr said. “But a predictable portion of this was self-imposed due to the grocery tax reduction.”

Separately, hourly workers in Alabama no longer have to pay income tax on overtime earnings. The cut on overtime is having a larger impact on the ETF than originally expected, ADN reported earlier this year. It could be up to $184 million.

Orr said the troubling aspect of the income tax flattening is that the state this year has seen unprecedentedly low levels of unemployment.

“A hiccup in the economy will mean unemployment rises and income tax revenues decrease substantially,” Orr said.

In the General Fund, as has been the case for more than a year, much of the growth has come from interest on state deposits and higher-than-usual interest rates. The revenue is up more than 51% this year and totals about $361 million.

“The 9% growth (in the General Fund) is great and far exceeds anything needed to fund obligations,” Fulford said. “However, it is important to note that $123 million of the $186 million in growth is from the interest on deposits. This means that rate cuts could have a large impact on the General Fund’s growth in the future. Thankfully, the budgets are not reliant on a continuation of this growth.”

The current year’s education budget is $8.8 billion, the General Fund budget is $3 billion. In both budgets, legislators did not appropriate all possible revenue. For fiscal 2025, which begins Oct. 1, lawmakers and Ivey this spring approved $9.3 billion and $3.4 billion spending plans, respectively.

Sen. Greg Albritton, who chairs the Senate’s General Fund budget committee, said recently he’s working on scheduling some summer budget hearings to hear from agency leaders about their fiscal situations. Albritton has organized similar meetings in previous years.

“We’re trying to figure out where we’re headed,” Albritton, R-Atmore, said. “The economy is questionable at best, it’s all built around federal spending and when we run out of other people’s money, it’s going to be a problem. I don’t know when that’s going to occur, but I’m unsure that we’re prepared for that.”

The meetings will likely start with the largest General Fund agencies. That typically includes Medicaid and the corrections, mental health, public health and law enforcement agencies.

“I want to get some numbers and look at the issue of growth and where we’re headed,” he said. “Programs and people and inflation and that type of thing.”

Those meetings have not yet been set.

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