February 14, 2021 | Kimberly Randall, LHC Program Coordinator 

Photo Courtesy of Getty Images 

Background 

For almost two decades, Alabama policymakers have debated whether or not to remove the sales tax on groceries. Currently, sales tax on groceries accounts for nearly $500 million in state revenue from a 4% sales tax, earmarked for education spending. Additionally, in many cases, local taxes are added to the state tax, making the total grocery tax as high as 11% in some areas of the state. According to Alabama Arise, Alabama is one of three states in the nation with no tax breaks on groceries, and the 4% markup accounts for as much as two weeks’ worth of food for a family.

While Mississippi currently holds the highest grocery state sales tax rate in the nation, other surrounding states such as Georgia and Florida have eliminated sales tax on most groceries. Overall, 37 states have eliminated sales tax on groceries, while ten have a reduced sales tax. In addition to the sales tax rates, food costs are increasing overall. According to a report by KPMG, average consumers are seeing increases of up to 20% on prices at the grocery store, compared to 2019. 

Proposed Legislation 

Currently, two bills are being discussed to eliminate the state sales tax on groceries. House Bill 174, proposed by Representatives Holmes, Hanes, Meadows, Wadsworth, Fincher, Mooney, Wingo, Kitchens, Howard, Warren, Drummond, Paschal, Whorton, Sorrell, Wheeler, Brown (K) and Shaver, reads: 

“Under existing law, the state imposes sales or use taxes upon certain persons, firms, or corporations. Sales of certain items are taxed at a reduced rate. Sales of other items are exempt from the taxes. This bill would exempt sales of food from the sales and use taxes beginning September 1, 2022.” 

Meanwhile, House Bill 173, proposed by Representatives Holmes, Fincher, Wingo, Meadows, Paschal, and Mooney, also eliminates the sales tax on groceries but offers an alternative funding method by way of state income tax to make up the budget deficit earmarked for education. 

“This bill would exempt sales of food from state sales and use taxes beginning January 1, 2023. Under existing law, individual income taxpayers are allowed to deduct the amount of federal income taxes paid or accrued within the year. This bill would amend Amendment 225 to the Constitution of Alabama of 1901… [to] limit the amount of federal income taxes paid or accrued an individual income taxpayer can deduct to a maximum of $4,000 for individuals filing as single, head of household, and married filing separately and $8,000 for individuals filing as married filing jointly.” 

Impact 

Reducing the amount of taxes for necessary purchases, such as groceries, has been shown to significantly impact the health of households falling below the poverty line. According to Zheng et al. (2021), states which impose income tax on groceries tend to see higher levels of food insecurity, which disproportionately affects lower-income households. In states with a sales tax rate of 4%, the probability of a household experiencing food insecurity rises 3% compared to states without a tax rate. 

Additionally, sales taxes on groceries correlate to higher rates of obesity. A recent study published in the Health Economics Review found that “Counties with grocery taxes have increased prevalence of obesity and diabetes [and] estimate the economic burden of increased obesity and diabetes rates resulting from grocery taxes to be $5.9 billion.” 

The main difference between the two bills comes from funding. HB174 allows the state sales tax to expire without a plan to replace the lost revenue for the education system. However, lawmakers have stated that the Education Trust Fund has seen an increase in recent years, and the ability to cut taxes overall could be beneficial for the state as a whole. HB173 creates a limit on the amount of federal income tax that individuals can write off on their state income tax filing, ultimately only increasing taxes on individuals falling in the top 5%. 

According to an analysis from Alabama Arise, the income tax proposal would offer a tax cut to the majority of Alabamians. 

Next Steps  

The Alabama Legislative Session is currently underway and will continue for several months. Both bills are currently being discussed in committee and have not yet gone to a vote. If you want to make your voice heard on this or future legislation, click here to identify your elected officials. 

Don’t know what to say? Check out this guide from the American Civil Liberties Union on drafting a letter to your government officials. 

Stay Informed 

Want to know more? Alabama Arise, a statewide, member-led organization advancing public policies to improve the lives of Alabamians who are marginalized by poverty, has officially endorsed HB173 due to the impact of removing the sales tax without jeopardizing the state’s education budget.