Alabama Legislature Advances Significant Tax Cuts, Including Reduction in Grocery Tax

In a move aimed at alleviating financial pressures on residents, the Alabama House of Representatives has unanimously approved a series of tax cuts totaling approximately $192 million. Central to this legislative package is a 1% reduction in the state sales tax on groceries, decreasing it from 3% to 2%, effective September 1, 2025. ​

Background on the Grocery Tax Reduction

Historically, Alabama imposed a 4% state sales tax on groceries. In 2023, lawmakers enacted a reduction to 3%, with provisions for an additional 1% decrease contingent upon a 3.5% growth in the Education Trust Fund (ETF). However, this growth threshold was not met. The newly passed House Bill 386 removes this stipulation, allowing the tax cut to proceed irrespective of ETF growth.

Additional Tax Relief Measures

Beyond the grocery tax reduction, the legislative package includes:​

• Retirement Income Tax Exemption: House Bill 388 increases the tax-exempt amount of retirement income for individuals aged 65 and older from $6,000 to $12,000, effective January 1, 2026. ​

• Standard Deduction and Dependent Exemption Adjustments: House Bill 389 raises the income thresholds and deduction amounts for standard deductions and dependent exemptions, providing broader tax relief to working families. 

  
  

Financial Implications

The reduction in the grocery tax is projected to decrease ETF revenues by approximately $121.6 million annually. The enhanced retirement income exemption is estimated to reduce income tax revenue to the ETF by $44.8 million each year. Despite these reductions, legislators express confidence in the state's fiscal health to support these tax cuts. ​

Next Steps

Having passed the House, these bills now await consideration in the Alabama Senate. If enacted, the tax cuts will provide substantial financial relief to Alabama residents, particularly by reducing the cost burden of essential groceries and supporting retirees on fixed incomes.