API’s 2025 BluePrint for Alabama provides policy options to significantly reduce the tax burden on Alabamians. Both the Alabama Republican & Democratic Parties recently announced tax reduction plans, with Republicans fast-tracking bills in the House of Representatives in an attempt to quickly implement their preferred proposals. Democrats will surely opine this week.
In the 2025 BluePrint for Alabama, published last December, the Alabama Policy Institute proposed moving to a flat individual income tax rate of 3.95% and eliminating the state’s 2% income tax bracket. Combined, these changes would save taxpayers an estimated $1.278B each year. The BluePrint also calls upon lawmakers to reduce the state’s corporate income tax rate from 6.5% to 4.75%, saving job creators an estimated $366.34M annually.
API supports immediately reducing the state’s sales tax on groceries to 2%. The sales tax rate was reduced to 3% on Oct. 1, 2023, however, under current law the second 1% reduction cannot take place until ETF growth projections reach 3.5%. Immediately phasing in the second 1% reduction in the grocery tax would save taxpayers an additional estimated $121.9M per year. API has long championed the idea of fully eliminating the state’s grocery tax.
The 2025 BluePrint for Alabama also promotes a permanent extension of the state’s overtime income tax exemption, which is currently set to sunset in June 2025. In the first nine months, the exemption saved taxpayers an estimated $232M. Permanently extending the overtime tax exemption would save working Alabamians an estimated $300M per year. Much of that money is put right back into the state’s economy and API believes incentivizing work is a good thing, especially in a state struggling with its workforce participation rate.
API’s proposals relating to individual, corporate, overtime income and the grocery tax would reduce taxes by an estimated total of $2.066B each year. If all three of these proposals were implemented, no spending cuts were made, and all projected 2026 transfers to reserve funds were continued (Educational Opportunities Reserve Fund, Budget Stabilization Fund, and Advancement and Technology Fund), there would be a projected shortfall in FY 2026. However, API asserts that it is not necessary to fill overflowing reserve funds or minimize tax cuts that have a real impact on voters to retain current saving or spending levels.
Finally, the BluePrint proposed eliminating the state’s business privilege tax, a fee charged to businesses for the privilege of locating in the state. Eliminating this tax would save businesses and their customers an estimated $95M annually. Total savings of the 2025 BluePrint proposals would be $2.161B.
House Democrat proposed tax cuts are more similar to API’s than the House Republicans, with several significant caveats. Under the Democrat plan, the state’s top individual income tax bracket would be reduced from 5% to 4%, the overtime tax exemption would be permanently extended, and the state’s sales tax on groceries would immediately be reduced to 2%. Democrats claim that the package would reduce taxes by a total of $1.7B each year.
However, in order to offset some of their proposed tax reductions, Democrats advocate for the adoption of a comprehensive gambling package (which API vehemently opposes); they claim gambling would generate $900M per year. Democrats would also repeal the wildly popular CHOOSE Act. Democrat tax cut proposals are admirable while their plans to offset the reductions would unduly harm schoolchildren from all 67 counties who need an opt-out from public education and the most vulnerable among us. Those ideas are non-starters.
House Republicans are fast tracking four bills aimed at reducing taxes; members of the Alabama State Senate weren’t consulted. First, the sales tax on groceries would be reduced to 2%, saving an estimated $121.9M each year. The House Republican plan would provide flexibility to local governments to reduce their share of the sales tax on groceries; this action would be highly dependent upon how which local governments reduce rates and by how much. Next, the House Republican tax plan would increase the floor to claim a dependent income tax exemption as well as increase the state’s standard deduction for some individual income tax filers. Estimates are that these proposals would save taxpayers $25.1M per year once fully phased in (2027).
Finally, the House Republican plan would increase the income tax exemption for retirement income from the first $6,000 to the first $12,000, saving retirees an estimated $44.8 million annually.
The House Republican plan would reduce taxes by $191.8M, leaving the ETF with a projected surplus of $1.468B in FY 2026 if the secondary spending limit and current ETF transfers were maintained. To reiterate: the House Republican plan would cut taxes less than simply retaining the overtime tax elimination and would retain a minimum of a $1.5 billion surplus in state budgets.
Comparing the House Republican plan to API’s BluePrint and House Democrat proposals, the BluePrint plan would reduce taxes by an additional $1.874B. The Democrat plan would reduce taxes by an additional $508.2M in comparison to House Republicans. The good news is that all parties seem to agree that tax cuts are necessary to combat bloated state spending and curb rampant growth in state budgets. Every budgetary and tax cut discussion should be accompanied by a debate relating to the elimination of NGO support, spending cuts, and a thorough examination of current statutory transfers to overflowing savings accounts. API encourages legislators to consider a more aggressive tax package to give immediate relief to Alabama taxpayers.
Stephanie Holden Smith is president and CEO of Alabama Policy Institute.
