Rep. Danny Garrett, R-Trussville (left), the chair of the House Ways and Means Education Committee, speaks with Sen. Arthur Orr, R-Decatur, the chair of the Alabama Senate Finance and Taxation Committee, in the Alabama House of Representatives on May 8, 2024 at the Alabama Statehouse in Montgomery, Alabama. Garrett sponsors legislation to reduce the grocery tax rate to 2%. (Brian Lyman/Alabama Reflector)
House Republicans last week filed a bill that would cut the state sales tax on groceries from 3% to 2%.
HB 386, sponsored by House Ways and Means Education Committee chair Danny Garrett, R-Trussville, would accelerate a timetable of a 2023 law that cut the tax on staple food items but left further reductions dependent on growth in the Education Trust Fund (ETF), which pays for public education in the state and which gets most of the grocery tax revenue.
“We have been consistently producing taxes since 2015 and 2016, so we are looking for opportunities to always maintain our status as the lowest cost in the country,” Garrett said in an interview Tuesday. “We were constantly analyzing our situation.”
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Democrats will propose their own legislation to reduce the state portion of the grocery tax, but the bill has yet to appear on the legislative website.
If approved, the state sales tax on groceries would go to 2% on October 1. Local grocery tax levies would not be directly affected by the bill.
The move represents something of a change for Garrett. Last September, state budget officials said growth in the ETF was expected to be below the 3.5% required under the 2023 law to cut the state share of the grocery tax.
Garrett was reluctant to support additional reductions to the grocery tax because of the potential impact on the ETF.
The House education budget chair said Tuesday that there are enough revenues and reserves to accommodate a decrease to the state’s portion of the grocery tax.
“We are looking at the revenue projections, our spending, and our reserves,” Garrett said. “We believe we can adequately fund this tax cut.”
Sen. Andrew Jones, R-Centre, a major advocate of the grocery tax reduction in 2023, said Tuesday he believed the grocery tax cut will be funded in part by allowing an income tax exemption for overtime wages to expire.
The law, also passed in 2023, was enacted with a sunset provision for this June.
The overtime exemption bill was expected to cost the ETF roughly $34 million. But the law is estimated to have cost more than $230 million and counting.
Jones said Tuesday he “never got the impression” the education budget chairs did not want to cut the grocery tax.
“My impression was, whenever you have a budget chairman, you want them to be someone who is conservative-minded, and someone who is going to make sure that they are very careful that our budgets are going to sustain whatever cuts we get because those cuts will be in perpetuity,” he said.
Kirk Fulford, deputy director of the Legislative Services Agency Fiscal Division, said Tuesday the ETF is in “great shape” because of the Rolling Reserve Act.
“There is currently a significant difference in what ‘can’ be spent vs. current ETF revenues,” he said. “The act has also allowed the balances in reserve funds to increase to protect the ETF, if there is a downturn in the economy that impacts revenues. So, if the spending limitations of the Rolling Reserve Act are maintained, the ETF could absorb some tax cuts.”
Advocacy groups such as Alabama Arise support the bills that Garrett introduced.
“We have always continued to beat the drum for cutting the remainder of the grocery tax, but it was a pleasant surprise to see this,” said Robyn Hyden, executive director of Alabama Arise.
A long-standing tax
Alabama has taxed groceries since the state sales tax was introduced in 1939. It is one of 13 states that taxes groceries. Until the 2023 law passed, it was one of only three states that fully taxed food.
The current 3% levy, combined with local taxes, means that Alabamians pay up to 9% of the cost of their groceries on taxes. A family buying $600 worth of groceries each month would, in some cities, pay an additional $54 on top of that.
Both liberal and conservative groups have been urging lawmakers to not only reduce the tax but eliminate it altogether.
HB 387, also sponsored by Garrett, removes the limit that local municipalities such as cities and counties may reduce the portion of their sales tax on food.
The legislation that lawmakers enacted to reduce the state’s sales tax on food happened in tranches, with the first reduction in September 2023 going from the current 4% rate to 3%. The goal was to eventually reduce the sales tax on food by half, to 2%, by 2024, but lawmakers inserted language into the legislation that the second reduction could only happen if the sales tax revenues that contribute to the Educational Trust Fund increased annually by 3.5%.
HB 387 leaves much of the law the same but imposes that additional 1% reduction by the start of the coming fiscal year this fall. The most significant change removes the requirement that the ETF revenues increase by 3.5%. HB 387 eliminates the $0.25 cap for reducing the local grocery tax and the stipulation that their general fund budgets for municipalities need to increase by 2%.
A fiscal note estimates that HB 386 would reduce revenues to the ETF budget by almost $122 million and reduce General Fund budget by almost $300,000.
The fiscal note from legislation enacted in 2023 estimated a loss of about $152 million to the ETF budget because of the initial rate cut and another $318 million from 2025 on.
The bills had not been scheduled for committee hearings as of early Tuesday afternoon. Hyden said her group is urging lawmakers for further reductions until the grocery tax is completely eliminated and made permanent.
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