Saving a few bucks on groceries, losing millions in revenue: Alabama’s tax issue

Alabama legislators came up with a seemingly simple way to address the rising cost of food. They approved a reduction in the state’s sales tax on groceries, meaning Alabamians would pay 2% on their purchases at the supermarket, rather than 3%.

But the effects of the tax cut aren’t so simple.

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Growth in state tax revenue has slowed in Alabama in recent years, and that trend is expected to continue in 2026. Lawmakers will likely have to find a new source to replace the revenue lost from grocery taxes, much of which had been earmarked for the state’s public schools.

Alabama’s grocery-tax reduction is a cautionary tale for other states grappling with inflationary increases in food prices. Solving one problem often creates another.

Revenue decrease

Alabama’s tax collections are still growing. But a 39-page report from PARCA — the Public Affairs Research Council of Alabama, a nonprofit research organization founded by a former Democratic governor — found that state revenue grew slower than in any year since 2017.

“We’re still seeing some revenue rates are going up,” Carol Gundlach, senior policy analyst at Alabama Arise, a nonprofit that advocates on behalf of people living in poverty, told Straight Arrow News. “They’re not going up as much as they were two years ago, but they are going up.”

But the state budget has been bolstered, the report said, by record levels of federal stimulus funds following the COVID-19 pandemic and a “quicker-than-expected economic recovery.” Most of that federal COVID-19 relief funding will dry up heading into the new year, however.

“They’re real worried about the loss of COVID money, and it’s going to hurt, certainly,” Gundlach said. “Like every other state, especially lower income states, it bailed us out during a tough time.”

PARCA also found state legislators held the line on spending to extend the state’s “budgetary winning streak.”

“We are one of the states that hasn’t expanded Medicaid,” Gundlach said. “We underspend on education. We underspend on everything. So, it’s pretty easy to save money when you don’t spend money.”

Both Gundlach and the PARCA report said the state also has strong reserves to help meet any challenges in the future.

Grocery tax change

Grocery prices nationwide have risen by as much as 3% this year, according to the U.S. Department of Agriculture — and by 25% to 30% since 2020.

Earlier this year, in an effort to address the rapidly rising prices, Alabama legislators approved a reduction in the state sales tax on groceries from 3% to 2%. The new rate took effect Sept. 1.

“When we can reduce taxes in Alabama and provide some relief to the hardworking people of this state, I am all for it,” Gov. Kay Ivey said in a statement at the time. “I was pleased to sign House Bill 386 to take another notch off our state grocery tax.”

The messaging by state lawmakers who supported the measure focused on lowering prices for low-income residents. So, will this really help those people?

“Not really,” Abir Mandal, senior policy analyst at the Tax Foundation, a center-right think tank based in Washington, told SAN. “And there are a couple of reasons for that.”

Mandal said the sales tax on groceries is regressive, meaning that everyone, rich and poor, is taxed at the same level.

“Think about the expenditure of food in different types of households,” Lingxiao Wang, postdoctoral research associate at Texas A&M’s agricultural research department, told SAN. “For poor households or low-income households, like one-third of their income purchases spend on food, right? Which means that one-third of your income is being taxed. However, for rich, high-income households, very minimal of their expenditure is spent on food, right? So, they basically pay very minimal amounts of money they earn on taxes.”

That’s opposed to a progressive tax.

“If you earn more, then you’re taxed more,” Wang said. “If you earn less, you pay tax less.”

Alabama ranks as the 12^th-most tax-regressive state.

“They make the poorest pay a disproportionate amount of their income in taxes, whereas the wealthy have a much lower tax rate,” Gundlach said.

Gundlach and Alabama Arise have supported fully removing the state grocery tax. Alabama is one of only 11 states with a statewide grocery tax.

While lowering that tax rate will marginally lower grocery bills, experts said that won’t help people who receive federal food assistance benefits.

“When you buy groceries with those benefits, those purchases are already tax-free, so you don’t pay sales tax on them anyway,” Mandal said.

Making up the difference

Experts told lawmakers that reducing the tax rate on groceries would cost the state around $152 million per year. With state revenue growth already slowing, Alabama will likely need to make up the difference.

“We are worried about that,” Gundlach said. “Part of that is because in Alabama, we earmark taxes like crazy. We are big believers in earmarking. And so, income taxes are earmarked to education. Largely, sales taxes are earmarked to education.”

The Alabama Education Association cautioned lawmakers against cutting the grocery tax without having a source to replace that lost revenue.

Wang said that when a state cuts one tax, such as the sales tax, it typically has to raise another tax, such as income or property taxes.

“It’s very reasonable for states to lower their grocery tax but increase their income tax or increase their property tax to maintain a stable tax revenue,” Wang said.

Replacing that lost revenue could impact the same people lawmakers tried to help by lowering the grocery tax.

“Unfortunately, to make up for those revenues, the government has to increase taxes on everything else,” Mandal said.

However, income and property taxes are progressive taxes so if those do every go up, it will have a larger impact on the wealthy.

Overall, PARCA believes Alabama is in good shape because of its reserves and a robust job market — meaning that less revenue from grocery taxes won’t have a huge impact.

“While there has been a decline, it has not been significant and has been offset by the tax rate on internet sales, which has just shot through the ceiling,” Gundlach said. “And so, if anything, people are saving money on groceries and spending more money on Amazon.”