Alabama education budget committee approves modest income tax cuts

The Alabama House Ways and Means Committee Wednesday approved legislation that would provide modest tax cuts to income taxes.

The legislation, sponsored by Rep. Danny Garrett, R-Trussville, the chair of the committee, would reduce one key rate and exempt taxes on some income.  HB 115 would, reduce the state’s income tax rate from the 5% to the 4.95% over the next five years. HB 116 would effectively eliminate the 2% tax rate on the first $500 earned by an individual taxpayer or $1,000 for a married couple. 

“We continue to be a low tax state and become a lower tax state,” Garrett said after the meeting on Wednesday.

Alabama’s income tax rates and thresholds were set in a 1933 constitutional amendment. The amendment sets the top rate at 5% for incomes over $3,000 and for married couples making over $6,000. The thresholds today would be equal to about $70,000 for single filers and $140,000 for married filers, according to the Bureau of Labor Statistics.

At the end of preceding committee meetings, Garrett had given presentations on taxes in Alabama. He said that Alabama is a low-tax state in those presentations.

The committee approved the legislation but amended it to push the effective date of the act from 2022 to 2023. 

Before the amendment, the Fiscal Division of the Legislative Services Agency estimated the bill would cost the Education Trust Fund the following amounts:

• $6.0 million in 2023
• $14.9 million in 2024
• $24.9 million in 2025
• $36.0 million in 2026
• $48.7 million in 2027
• $54.2 million in 2028 and after

Under HB 115, an individual with a taxable income of $53,913 — the median household income in Alabama in 2021, according to the U.S. Census — would see his or her state income tax bill fall about $26, from $2,656 a year to $2,630. A married filer with that income would see their state income tax bill fall about $24, from $2,616 to $2,592.

HB 116’s fiscal note, which also does not reflect the amendment, predicts that it would cost the Education Trust Fund around $17.9 million in 2023 and $24.2 million in years after. Eliminating the 2% tax would cut an individual taxpayer’s bill by about $10, and a married couple’s bill by about $20. 

The Education Trust Fund should receive $8.26 billion in the current fiscal year, which ends on Sept. 30

HB 85, sponsored by Debbie Wood, R-Valley, which would provide income tax write-offs to State Parks Division of the Department of Conservation and Natural Resources, the Department of Mental Health, or the Alabama Medicaid Agency and HB 160, sponsored by David Faulkner, R-Mountain Brook, which updates the language to reflect the March of Dimes, Inc. in the administrative code also passed committee.