The state of Alabama is poised to end this fiscal year with a decline in sales tax revenue, the first time that’s happened in 15 years.
At the end of August, sales tax receipts were down $42.2 million, or -1.8%, to $2.3 billion.
Unlike 2009, it’s largely policy change in the form of a tax cut — not a recession — driving this decrease, budget experts note.
But sales tax revenue is the second largest source of money for the Education Trust Fund, which supports K-12, community college and four-year education in the state, and legislative leaders will be monitoring the numbers that could impact 2026 spending and other legislation.
“We are watching this carefully,” Sen. Arthur Orr, R-Decatur, told Alabama Daily News. “The Legislature felt strongly about reducing the grocery tax but unlike Washington, we have to balance our budgets and that reduction has to come from somewhere.”
Lawmakers and Gov. Kay Ivey last year knocked one cent off the state’s four-cent sales tax as it applied to most groceries.
Earlier this year, each 1 percent of the state sales tax on food represented a little less than $10 million per month into the ETF, Kirk Fulford, deputy director of the Legislative Services Agency, said.
That sales tax revenue number is for in-person, in-store purchases. Online purchases are taxed and distributed differently and have risen this year, adding new revenue to the ETF and General Fund. Legislation increasing the online sales tax rate has been filed for the 2025 session.
Income tax receipts — the largest source of funding to the ETF — also declined in August but are still up over the year. The ETF saw a total decrease of -2.76% in August compared to August 2023 but was up 1.2% year-over-year to $9.4 billion.
“Including the beginning balance, total available funds through August are roughly $11.93 billion and total obligations, including supplemental appropriations and transfers, are only $11.32 billion,” Fulford said. “In other words, the ETF needs no additional revenue in September to cover its obligations for FY 2024.”
Fulford’s office now has a public dashboard that highlights some of the monthly revenue report details and year-to-date data.
The 2025 legislative session begins in February and Orr, who chairs the Senate education budget committee, said the ETF’s receipts will be a factor in whether sales tax exemption bills are considered. Dozens can be filed in any given session. Orr this year proposed removing the sales tax from menstrual products, baby formula and several other baby care items. Rep. Neil Rafferty sponsored the bill in the House. Orr said he’ll file it again in 2025, but whether it advances depends on the health of ETF revenues.
“We’re going to have to see where we are (with the sales tax revenue) in March, April and May as we’re getting down to decision time on that bill and others,” Orr said.
Orr said he’s also considering for 2025 the legislation he last had in 2023 to reduce the top state income tax rate of 5% to 4.95% over several years. An estimate from previous legislation said it would decrease revenue to the ETF $54.2 million annually.
Orr said as long as the economy stays healthy and the state is focused on getting more people in the labor market, he’s not concerned about income tax revenue in the ETF.
Fulford said the primary driver of growth in the ETF this year has been corporate income tax receipts. Through August, gross corporate payments are up by $137.9 million, 12.11%.
According to the Council for Leaders in Alabama Schools, legislation passed this year will have at least a negative impact of $24.7 million in fiscal 2025 and negative $132.7 million in 2026.
Rep. Danny Garrett, R-Trussville, said the ETF will finish 2024 with a surplus and the state won’t spend all possible funds in 2025, instead putting some in reserves. While there may be some belt-tightening ahead, he said he’s not overly concerned with the current revenues.
“I think when you look at the way we’ve budgeted, not spending everything we have, we’ve built some reserves and we’re going to continue to build reserves,” said Garrett, the House education budget committee chairman. “We’re not surprised by the flattening and slight dip in the current receipts. We have to see how things shake out, but we’ve got our eye on that, we’ve budgeted for this for the past several years knowing this day was coming.”
Like the ETF, the General Fund, which supports non-education state agencies, does not need additional revenue in September to meet its 2024 obligations. Year-to-date General Fund receipts were $3.17 billion through August, a total increase of $224.47 million or 7.63%. Of that growth, $146.1 million is from interest on state deposits, Fulford said.
Since 2021, the state has benefited from higher-than-normal interest rates set by the Federal Reserve.