Alabama House approves grocery tax cut, income tax adjustments

Yahoo

19-03-2025

Rep. Danny Garrett, R-Trussville, looks up to the gallery of the Alabama House of Representatives on March 18, 2025, at the Alabama State House in Montgomery, Alabama. The chamber unanimously passed a $192 million tax cut package of bills sponsored by Garrett. (Anna Barrett/Alabama Reflector)
The Alabama House of Representatives unanimously passed $192 million in tax cuts in a four-bill package on Tuesday.
HB 386, 387, 388 and 389, all sponsored by Rep. Danny Garrett, R-Trussville, will reduce the state grocery tax by 1%; allow local governments to cut their grocery taxes; increase the amount of retirement income exempt from taxes and increase income tax thresholds, deductions and child credits for those making less than $120,000 a year.
The money comes out of the $9.2 billion Education Trust Fund (ETF), which pays for most public education funding in the state.
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Garrett said in an interview that the overtime tax exemption served as an obstacle in reducing taxes on groceries. The exemption cost the ETF $234 million, well above earlier projections, and Republican legislative leaders had signaled they would not renew the deduction when it expires in June.
'And so what we've done is basically pass taxes that are broader,' Garrett said. 'If it's sunsets, then we'll have a chance to evaluate it and sort out some things.'
HB 386 would reduce the state's tax on groceries from 3% to 2%. Alabama is one of 13 states that taxes groceries, according to the AARP. Alabama Republicans have been working on reducing the grocery tax from its original 4% since 2023. The reduction to 2% was only supposed to happen if the ETF's revenue grew by 3.5%, but that target has not been met.
Garrett said the legislation will accelerate the grocery tax reduction, and it will go into effect on Sept. 1 if it passes.
'The next 25% reduction was going to take place when revenue grew 3.5%,' he said. 'That has not happened this year, it probably will not next year.'
The grocery tax reduction takes $121 million from the ETF's revenue.
HB 387 is similar. It allows but does not require local governments to reduce local grocery taxes. House Speaker Nathaniel Ledbetter, R-Rainsville, said after the House adjourned that local governments are already allowed to increase grocery taxes, but not decrease.
'They've always had the opportunity to raise it, but they didn't have the opportunity to decrease it,' he said. 'Hoover wanted to decrease one and because of the state law, it couldn't. So this gives them the opportunity to do that.'
HB 388 increases the amount of untaxable retirement income for Alabamians older than 65 from $12,000 to $24,000 for couples and from $6,000 to $12,000 for individuals. Ledbetter said it is good for senior citizens of the state.
'You know, they're on fixed income, and helping them with the ability to do better as far as finances go is important,' Ledbetter said in an interview.
HB 389 increases the threshold for optional income tax deductions. Under current law, married taxpayers filing jointly can deduct $8,500 if their income is less than $25,000. The proposed legislation increases the optional deduction to $9,500 if the couple's income is less than $28,000.
Dependents of a married couple filing jointly whose gross income is less than $60,000 can deduct up to $1,000, which is up from the household income of $50,000. For families making less than $120,000, their dependents can claim deductions of up to $500, which is up from a household income of $100,000.
The cuts will mostly impact the Education Trust Fund budget. Rep. Thomas Jackson, D-Thomasville, said he worried about the effect, saying that the body should focus on improving education rather than diminishing its budget.
'How are we going to regroup and replenish the Education Trust Fund budget when we're taking so much from it?' Jackson asked Garrett on the House floor.
But Garrett said the ETF would not feel the impact.
'We feel through the growth of the budget and through continued good, fiscally responsible budgeting practices, we can sustain these cuts,' Garrett said on the House floor. 'But the answer to your question is: if we can improve the education outcomes, if we can improve labor participation, those are the types of things that are going to help us grow our revenue stream.'
Ledbetter said he is supportive of the package because it will impact most Alabamians.
'The tax breaks we did today affects everybody in this state, and that was a priority to make sure it was widespread and affected everybody, especially the senior citizens,' Ledbetter said.
Ledbetter said although he is supportive of an overtime tax exemption, it is more important to be fiscally responsible and fund education.
'I get it and I certainly support that,' Ledbetter said. 'But I also think there is a balance, as far as being able to afford it.'
Garrett said he would rather have a tax reduction that impacts all Alabamians than one that costs $300 million and affects a smaller group of Alabamians.
'I think what we're doing is broad-based that's going to affect a lot of Alabama,' he said.
The package now goes to the Senate.
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