The state sales tax on most grocery items declines by 1 percentage point to 2% today. It’s the second such cut since 2023.
The decrease, approved by lawmakers and Gov. Kay Ivey earlier this year, is expected to have a nearly $122 million impact on Alabamians — and the state’s Education Trust Fund, which supports education.
“The Legislature has been over the last several sessions reducing taxes and we’re happy that we’ve cut the grocery tax 50%,” Rep. Danny Garrett told Alabama Daily News on Friday. Garrett, R-Trussville, is chairman of the House education budget committee and sponsored this year’s legislation.
“We expect there’ll be more tax relief provided in the future,” Garrett said. “Part of our mindset is that we’re going to continue to provide tax relief on a measured basis.”
Advocates for years have argued the sales tax on food disproportionately hurts the low-income. They’re celebrating this latest decrease and pushing for further reductions in the future.
“The state grocery tax reduction from 4% to 3% in 2023 was an essential first step toward tax justice in Alabama, and this year’s reduction to 2% continues that momentum,” Robyn Hyden, executive director of Alabama Arise, said in a written statement last week. “House Bill 386 is another important step toward righting the wrongs of our state’s upside-down tax system, which forces Alabamians with low and moderate incomes to pay a higher share of their incomes in state and local taxes than the wealthiest households.”
Income and sales taxes are its largest revenue streams. As of July, the ETF’s revenues had increased 3.26%, $276.6 million, over fiscal 2024 to $8.75 billion.
That initial 2023 tax cut legislation tied a future decrease of one percentage point to expected 3.5% growth in the state’s Education Trust Fund. But that didn’t happen for 2024 and wasn’t expected this year, so lawmakers moved to push forward the one percentage point reduction in the biggest tax-cut bill of the 2025 session.
“It’s another significant step for our state to eliminate another percent of taxes on food,” Sen. Arthur Orr, R-Decatur, said. “Additionally, we passed legislation that takes away any ambiguity and legal uncertainty for local governments to begin the process of removing their taxes on food as well. All in, it’s a big win for all citizens of Alabama because everyone is certainly a purchaser of food at the grocery store.”
Also today, the 4% state sales tax comes off many baby care, feminine hygiene and maternity products. Rep. Neil Rafferty, D-Birmingham, and Orr sponsored that legislation.
While legislative leaders say they want to keep lowering taxes, they’re also aware of challenges in the fiscal 2027 budget, which they and Gov. Kay Ivey’s office will approve in the spring.
“Next year, for the General Fund and the Education Trust Fund, we’re looking at some real challenges,” Orr said. He’s chairman of the Senate education budget committee and on the General Fund committee.
The state’s health insurance program for education employees will need an additional about $380 million in fiscal 2027, Orr said. It’s unclear how much of that will need to come from the ETF.
Meanwhile, there are retiree bonuses and teacher pay raises to consider. Teachers didn’t get a pay raise in the fiscal 2026 budget that goes into effect next month. Meanwhile, inflation is still a factor on spending and the Teachers Retirement System will likely need a larger state contribution.
“You’re looking at more than $400-plus million (in new expenses),” Orr said.
Separately, lawmakers last week learned the Children’s Health Insurance Program, which helps pay for health care for kids in working, low-income families, needs an additional $15 million in fiscal 2027 for a total of about $100 million. That’s currently a General Fund expense, but budget leaders there indicated some of the cost should be shifted to the ETF.