Arise 2020: End Alabama’s state grocery tax and protect school funding

The Bible says that “to everything there is a season.” And we’re increasingly optimistic that the season has finally arrived for real tax reform in Alabama.

For more than a decade, Alabama Arise has worked to end the state’s 4% sales tax on groceries. It’s a regressive, punitive tax that costs struggling Alabamians the equivalent of two weeks’ worth of groceries each year. Legislation to untax groceries passed the House in 2008 but came up one vote short in the Senate. Arise has supported similar legislation in the years since, but it hasn’t come that close to passage again.

So why wouldn’t the Legislature cut the state sales tax on groceries? Ending a regressive and unpopular tax would seem to be an easy lift for even the most skeptical legislator. And that would be true if the vote were simply to end the state grocery tax.

But eliminating the tax without replacement revenue would strip $480 million out of the Education Trust Fund (ETF) budget. It would be irresponsible to take that much funding away from public schools, especially given Alabama’s history of underfunding education. Whether and how to replace that revenue has been a sticking point in the grocery tax debate.

How to untax groceries without costing education a dime

It’s crucial to replace the grocery tax revenue without hurting the people who would benefit most from the tax’s elimination. Fortunately, Alabama has a way to untax groceries while protecting both struggling families and education funding.

That solution would be to end an unusual tax loophole that primarily benefits the richest Alabamians: the federal income tax (FIT) deduction. This loophole allows people to deduct their federal income tax payments on their state income taxes. Because wealthy people pay more in federal income taxes on average, 80% of the FIT deduction’s benefit goes to the top 20% of taxpayers in Alabama.

The FIT deduction is a skewed tax break for rich households. And it’s one big reason Alabama’s tax system is upside down. For those who earn $30,000 a year, the deduction saves them about $27 on average. But for the top 1% of taxpayers, the FIT break is worth an average of more than $11,000 a year.

Most Alabamians would get a tax cut from untaxing groceries and ending the FIT deduction. Here is the estimated net tax change as a share of income if Alabama eliminated its federal income tax deduction and state sales tax on groceries. Bottom 20%: -2.78%. Next 20%: -1.21%. Next 20%: -0.9%. Next 20%: -0.47%. Next 15%: 0.04%. Next 4%: 0.49%. Top 1%: 0.95%.

Only two other states offer a full FIT deduction like Alabama does.  (Three other states offer a partial deduction.) Ending the FIT deduction would bring an additional $782 million a year into the education budget, according to the Institute on Taxation and Economic Policy. (Ending the FIT deduction on corporate income taxes would raise another $100 million or so.) That would be more than enough to remove the state sales tax on groceries without hurting public schools. And for a large majority of Alabamians, the net result would be a tax cut.

Legislators also are exploring the idea of untaxing groceries and replacing the revenue by capping the FIT deduction. SB 144, sponsored by Sen. Andrew Jones, R-Centre, would end the state grocery tax and limit the FIT deduction to $6,000 for individuals and $12,000 for couples. The bill wouldn’t raise additional money for education, but it would cover the cost of untaxing groceries.

Most Alabamians would get a tax cut from untaxing groceries and capping the FIT deduction. Here is the estimated net tax change as a share of income if Alabama capped its federal income tax deduction at $6,000 for a single tax filer and $12,000 for a couple filing jointly. Bottom 20%: -2.81%. Next 20%: -1.31%. Next 20%: -1%. Next 20%: -0.62%. Next 4%: 0.31%. Top 1%: 0.93%.

You can help end the grocery tax this year

We’re seeing promising signs that 2020 could be the year the Legislature finally ends the state grocery tax. After passing an unpopular gas tax increase in 2019, some key legislators have been talking about giving a tax break to families hit hardest by higher transportation costs.

Arise has met with many legislators in recent months to discuss the importance of taking the state sales tax off groceries. We’ve found widespread agreement that the time is right to make that happen. And many legislators are finally willing to consider closing the unfair loophole that the FIT deduction opened up in our income tax system.

We need you with us as we work to untax groceries and protect education funding in Alabama. Please join Alabama Arise or renew your membership today to add your voice to our chorus for change. Together, we can build a better Alabama!

Updated March 10, 2020.