Criticism of Tax Cut Decisions in Alabama

This week, the Alabama Institute of Policy Research (API) voiced its discontent with lawmakers in Montgomery for not continuing tax cuts on overtime pay during the 2025 legislative session.

Instead, the government opted to reduce the state’s grocery tax from 3% to 2%, a change that took effect on September 1, 2025.

On Wednesday, API released a statement asserting that the tax cuts previously enacted had saved Alabamians millions annually.

“About two years ago, the Alabama legislature enacted groundbreaking reforms to exclude overtime pay from state income tax calculations,” API noted.

They added that in states with low labor participation rates—like Alabama’s 57.8% in March 2025—this exemption was significant, providing much-needed relief amid ongoing labor shortages for businesses. The exemption reportedly saved workers over $3,000 in its first nine months.

Some argued for extending these tax cuts, suggesting that the shortfall in the Education Trust Fund (ETF) was larger than anticipated. However, API contended that this deficit should not be a reason to eliminate the tax cuts.

“Almost all income tax revenue supports the ETF budget,” the statement explained. “In 2024, ETF revenues totaled over $10.665 billion, representing roughly 3% of the $320 million from the overtime tax. Additionally, local school funding reached $53.1 billion in 2024.”

API believes Alabama should take cues from other Republican states regarding tax cuts.

While many southeastern states, including Mississippi and Georgia, have seen significant revenue growth and used that to provide substantial income tax relief, Alabama has stuck with limited, targeted taxpayer support.