How do Alabama’s property taxes work?

The 1901 Alabama constitution established a property tax of 6.5 mills to help fund the state government. That was 30 years before our state had income or sales taxes. More than a century later, the state property tax rate has not changed.

Property tax is applied to real estate, motor vehicles and boats as a millage rate. A mill is 1/10 of a cent, so a 1-mill tax amounts to $1 of tax per $1,000 of taxable property value. Three mills of the revenue from Alabama’s 6.5-mill state property tax is earmarked for the Public School Fund, which helps pay for school construction projects, while the rest supports other services.

The 6.5-mill state property tax is a small part of your property tax bill. The larger part is your local property tax, which pays for public schools and local services like parks and fire protection. In 2020, local property taxes generated nearly 86% of total property tax revenues in Alabama. By state law, each school district must have at least 10 mills of local tax dedicated to education. Local property taxes (excluding the state one) vary widely depending on where you live, ranging from 19.5 mills in rural Coosa County to 109 mills in Mountain Brook (in Jefferson County). Even so, Alabama’s average local property taxes are the lowest in the country.

Local governments regularly assess the value of property for both state and local tax purposes. The assessed value is the portion of the appraised value (or fair market value) that the government uses to calculate the amount of property tax. (See the graphic above.)

Alabama taxes property at only a fraction of its value. Since the so-called Lid Bill capped property tax collections in 1978, the state has used the following system of property classifications for assessing taxes:

• Utility company property is assessed at 30% of fair market value.
• Commercial property is assessed at 20%.
• Individually owned vehicles are assessed at 15%.
• Farms, timberland and owner-occupied residential property are assessed at 10%. Huge corporate farms and timber holdings are treated the same as 100-acre family farms. The homestead exemption exempts from property taxes (except countywide school taxes and school district taxes) the first $4,000 of an owner-occupied home’s assessed value (an amount equal to $40,000 of appraised, actual value).

If Alabama taxed residences at their full value, a 1-mill tax on a $100,000 house would be $100. But the state taxes homes on only 10% of their value, so a $100,000 home is assessed at a taxable value of $10,000. (See the “lesson 1” graphic at the top of this page.) The homestead exemption lowers the tax even further, meaning you don’t pay on the first $4,000 of the amount subject to tax.

Alabama has numerous property tax exemptions for older adults and people who are blind or disabled. In fact, some Alabamians who are aged 65 and older or who have disabilities pay no property tax at all. Senior married couples who have a gross income of less than $12,000 are exempt from all state and county property taxes on their homestead and up to 160 acres of land. Alabamians who are blind or permanently disabled are exempt from all property taxes.

Racial inequity at a glance

The racial impact of property taxes is complex. The most important source of household wealth for most people is homeownership. In part because of low property tax rates, Alabama’s Black homeownership rate is the nation’s fifth highest at 50.1% of households. This promotes higher rates of household and intergenerational wealth. But racial disparities in both tax assessment and property valuations reduce the benefits of a high homeownership rate.

Several counties in Alabama’s Black Belt, a region with high poverty rates and a predominantly Black population, have property tax valuations well above the average for all Alabama counties. And because Alabama earmarks most property taxes for education, Black families are disproportionately harmed by underfunded schools. Many rural Black Belt counties lack a strong economic and retail base, limiting sales taxes and other revenues for education. Coupled with constitutional restrictions on property tax rates, this forces many counties to increase home assessments to fund their schools.

Alabama needs to find a solution that supports homeownership, while reducing unfair tax assessment of Black-owned property and providing adequate funding for public schools in rural communities.

Alabama’s Black Belt region includes these 18 counties:

• Barbour
• Bullock
• Butler
• Choctaw
• Crenshaw
• Dallas
• Greene
• Hale
• Lowndes
• Macon
• Marengo
• Montgomery
• Perry
• Pickens
• Pike
• Russell
• Sumter
• Wilcox

How do Alabama’s property taxes measure up?

Alabama property owners overall pay the lowest combined local and state property taxes in the United States. In fact, the average combined taxes could double and still be below the national average. There are two main reasons for this ranking:

First, Alabama’s agricultural property tax breaks are poorly targeted. In the 1970s, rapid expansion of commercial and residential development increased the value of rural land near cities and towns. To keep property taxes on farms from skyrocketing, the Legislature created a set of formulas to assign discounted values based on current use of land. Alabama’s current use formulas allow landowners to pay far less than they would in other states. The maximum value per farm acre (for the best land) is $532 – unchanged since 1982. The maximum value per timber acre is $827.

Alabama’s agricultural landscape has changed in the last 40 years. Today, owners of giant corporate farms and timber holdings take advantage of discounts originally designed to protect smaller farmers. These discounts lead to severely undertaxed timberland, which contributes to the underfunding of health care, education and other valuable investments. Alabama places no limit on the size of a farm that benefits from reduced property tax rates. Georgia, by contrast, has a 2,000-acre limit on farms that qualify for a current use exemption. This cap protects family farmers while still ensuring equitable taxes on large corporate landholders. Alabama counties tax timberland at rates one-half of those paid by owners in similar counties in Florida, and only one-third of those paid by owners in similar counties in Georgia, Tennessee and Mississippi, according to a 2020 study by researchers at Auburn University and other institutions.

The severe undertaxing of Alabama’s timberland primarily benefits wealthy landowners – often large, profitable corporations – with limited ties to the community where their property is located. Nearly 60% of Alabama timberland is owned by people living outside of the county where the land is located. Alabama’s share of foreign-owned agricultural land in 2023 was 8%, more than twice the national average, according to the U.S. Department of Agriculture.

Second, Alabama’s constitution makes it hard for localities to raise property taxes but easier for them to increase sales taxes. Wealthy landowners and industrialists built barriers into the state’s 1901 constitution to shelter property from adequate taxation. Those barriers still exist, and the Lid Bill of 1978 made them even tougher.

How could we improve our state property tax?

Keep in mind: Alabama’s per-person property tax collections are the lowest in the nation. To fill the resulting funding gap, many communities have high sales taxes, which make our tax system more regressive. We need a better approach.

The property tax reforms below would help restore balance to Alabama’s upside-down tax system. Large landholders would pay more, while small-scale farmers would pay less. And Alabamians’ overall property taxes still would remain below the national average.

• Evaluate and update the state property tax rate. Property taxes are primarily a local revenue source but are subject to complex web of state restrictions. Many of these limits were erected by the 1978 Lid Bill and forgo revenue by providing large tax breaks to huge corporate landowners and wealthy homeowners. By contrast, the best form of relief are circuit breakers, which limit property tax liability to a certain share of income for households and renters with low and moderate incomes. In addition, many wasteful and ineffective property tax abatements for businesses need to be repealed.
• Increase overall property tax rates. Modest increases could generate a large amount of new revenue to strengthen public schools in communities across Alabama. One pathway would be to tax business property at the same assessment ratio as utility property. The state also could raise the minimum local millage rate for public schools from 10 mills to 20 mills.
• Protect homeowners with low incomes by increasing the homestead exemption. Excluding the first $50,000 of a home’s value from state taxes would provide a 25% increase in this exemption.
• Protect small-scale farmers by creating a “farmstead exemption.” This could be done by increasing the homestead exemption for a farmer’s home, or by creating a farmstead exemption that would protect average-sized family farms. Another option would be to create a new farmstead exemption for a certain number of specified improvements (such as irrigation systems).
• Adjust property taxes on timberland to bring them in line with surrounding states. Out-of-state investors own a substantial share of Alabama timberland, and they pay roughly a third of the property tax that their counterparts in Georgia and Mississippi do. Current use formulas set the value of Alabama timberland between $360 to $827 per acre depending on productive capacity. Alabama assesses timberland at 10% of these values for tax purposes, while the comparable figure is 40% in Georgia. Increasing the assessment rate to 20% for timberland holdings above 500 acres would protect most family timberland owners while raising revenue for counties to meet local needs.

The Alabama Tax and Budget Handbook

What taxes do businesses pay in Alabama?

How does Alabama tax businesses?

Business taxes provide the important “fourth leg of the stool” of our tax system. Alabama’s business taxes were restructured in 1999 after courts ruled the old system unconstitutional because it taxed out-of-state companies at a higher rate.

Today’s structure relies on two taxes:

First, the corporate income tax is a 6.5% tax on the taxable profits of corporations doing business in Alabama. Like all states, Alabama is barred by federal law from taxing all of the income of multistate companies. Each state uses apportionment rules – based on the share of business activities that take place in the state – to divide these companies’ profits into in-state and out-of-state portions. A 2021 change in Alabama’s apportionment rule moved some manufacturing profits into the out-of-state portion, further reducing corporate income taxes owed to Alabama.

In place of the income tax, insurance companies pay taxes on premiums. Utility companies pay both income taxes and taxes on gross receipts.

Second, the business privilege tax is a tax on the company’s net worth. In Alabama, this tax is capped at $15,000 a year. (That’s a problem. See “How do Alabama’s business taxes measure up?” below to learn why.)

Businesses pay other state and local taxes as well:

• Nearly a quarter of the tax dollars that businesses pay are for state and local sales taxes on items purchased for their own use or consumption. The sales tax does not apply to “inputs to production” or goods offered for resale. For example, Alabama taxes the pizza sold by a restaurant, but the restaurant does not pay state tax on the flour or other raw ingredients. Businesses pay an excise tax on motor fuels for business use.
• Businesses pay at least twice the rate of property tax that homeowners pay. Business property is taxed on 20% of appraised value, and utility property is taxed on 30%.
• Businesses contribute to employees’ payroll taxes for unemployment insurance, workers’ compensation and disability insurance.

A 2021 change in Alabama’s apportionment rule moved some manufacturing profits into the out-of-state portion, further reducing corporate income taxes owed to Alabama.

This graph reveals some striking ways in which Alabama’s business taxes differ from national patterns:

• Alabama is sharply below average in its reliance on the property tax for business tax revenues.
• The state is sharply above average in use of business excise (e.g., motor fuel) taxes.
• Unemployment insurance taxes account for a lower share of business taxes in Alabama than the national average.
• Alabama businesses pay more in sales taxes than the national average, reflecting the state’s high overall sales tax rate.
• Licenses and fees account for a higher percentage of business taxes in Alabama than the national average, adding to strain on small businesses.

Racial inequity at a glance

Alabama offers significant subsidies and tax breaks to companies operating, expanding or locating in economically disadvantaged areas of the state called “enterprise zones.” Enterprise zones originally were classified as geographic areas (like Alabama’s Black Belt) suffering from high unemployment, low educational attainment levels, population decline or other signs of economic distress. In 2019, however, Alabama expanded its definition of “enterprise zone” to include any Alabama county with a population of less than 50,000. As a result, 45 of Alabama’s 67 counties have become eligible for tax incentives and exemptions originally targeted to the most economically disadvantaged areas of the state.

Despite the expansion of eligibility for these subsidies, Alabama remains one of the poorest states in the nation, as economic development has remained close to stagnant in many parts of the state. In 2023, Good Jobs First (GJF) assessed the relationship nationwide between race, ethnicity and corporate subsidies. The group’s findings indicated that states that provide economic development subsidies in the way that Alabama does often exacerbate racialized inequality. These kinds of subsidies often disproportionately transfer public wealth to white male executives and the companies they run, according to GJF.

How do Alabama’s business taxes measure up?

Alabama’s corporate income tax collections declined as a share of revenue between 2005 and 2015 but have since increased to account for 11.2% of tax revenues for the ETF. State and federal corporate tax laws and loopholes have been the major driver of changes in corporate income tax collections. Federal corporate tax law affects Alabama’s tax collections because the two often are linked by state law.

Yet Alabama provides many special business tax breaks of its own. For example, Alabama is the only state to let corporations deduct all of their federal income taxes from state taxable income. (Missouri allows a partial deduction.) This lowers the effective tax rate (the tax as a share of profits) dramatically. On the surface, Alabama’s 6.5% corporate income tax rate is higher than the rate in neighboring states. But the effective rate (including the federal income tax deduction) may be significantly lower.

Recent legislation has proposed eliminating the federal income tax deduction while reducing the corporate income tax rate, making Alabama a more competitive location for new businesses. Other legislation passed in recent years allowed corporations to exclude federal COVID-19 relief funds as income when calculating their state taxes.

Alabama is one of a declining number of states (16 now, down from 25 in 2015) that levy a business privilege tax. But Alabama caps the tax, unlike most other states with a business privilege tax. Companies above the cap pay taxes on a lower share of their net worth – an advantage of being big. Because it’s based on net worth instead of profits, the privilege tax is less sensitive to economic changes than the income tax – and less susceptible to tax avoidance techniques. A bill to eliminate Alabama’s business privilege tax nearly passed the Legislature in 2022.

On the surface, Alabama’s 6.5% corporate income tax rate is higher than the rate in neighboring states. But the effective rate (including the federal income tax deduction) may be significantly lower.

Many multistate corporations are able to avoid state income taxes due to how they are allowed to treat income earned, or spent, in other states or nations. In 28 states and the District of Columbia, state laws requiring combined reporting of out-of-state income and expenses address this problem. By requiring this information on a state income tax return, states can ensure that corporate income is appropriately reported and required taxes are paid on that income. Despite legislative efforts, Alabama still does not require combined reporting, allowing creative accounting to reduce income taxes owed here. Alabama would see an overall revenue gain of $371 million a year if we adopted domestic and worldwide combined reporting, according to a 2025 estimate from the Institute on Taxation and Economic Policy.

Businesses also benefit from economic incentives, usually in the form of tax breaks, intended to encourage location or expansion in Alabama. Recent changes in state law have increased the employment and wage standards that companies must meet in exchange for incentives – and have improved the state’s ability to hold companies accountable for failing to meet commitments. Still, much work remains to ensure full transparency in reporting the costs and benefits. Legislation passed in 2023 improved transparency somewhat, but it remains difficult to track which corporation received incentives or how those incentives benefited workers or the state. Alabama lost almost $179 million from incentives in 2023, Good Jobs First estimated based on state and federal tax reports, with our largest cities and counties losing an additional $231 million in tax revenue that year.

How could we improve our business taxes?

Businesses benefit from vital public infrastructure like education and roads just as individuals and families do. Numerous changes to Alabama’s business taxes could make them fairer and ensure businesses pay an equitable share of the cost to maintain and enhance the common good:

• Remove the deduction for federal income tax payments and drop the corporate income tax rate to 6%. The current 6.5% rate really amounts to 4.2% when factoring in the deduction for federal income tax payments.
• Raise the cap on the business privilege tax so the largest and most profitable corporations will compete more fairly with smaller ones. Even with this change, Alabama’s business tax levels would remain below those of most other states.
• Adopt combined tax reporting for businesses and their subsidiaries. By treating a company and all of its related enterprises as one taxpayer, Alabama could keep a business from deducting payments to its own subsidiary from its state taxes. This change also could prevent corporations from shifting taxable in-state earnings to other states to avoid Alabama taxes. Alabama should embrace the approach taken by 28 states and the District of Columbia to require accurate reporting of out-of-state income and expenses.
• Restore Alabama’s three-factor apportionment formula for calculating corporate income tax liability. Until 2021, Alabama’s formula accounted for companies’ shares of payroll, property and sales located in the state. But the current formula, known as “single sales factor,” is based solely on sales. Many states that have adopted a single sales factor formula have seen significant decreases in corporate income tax revenue.
• Decouple Alabama’s business taxes from the federal tax code so that tax breaks or increases given by Congress do not automatically apply to state business taxes. This would allow the Legislature to decide for itself if a particular tax break is good for Alabama.
• Limit tax incentives for luring companies to Alabama. Many companies rank tax breaks low among the reasons they choose to locate in a state, but they still bargain for the best incentive plan they can get. Numerous studies show the most effective incentives are a skilled workforce, a good education system and other quality-of-life measures. Large corporations should pay their fair share to support those investments.

The Alabama Tax and Budget Handbook

How could we make our tax code more fair?

Alabama can move forward by changing its outdated, imbalanced approach to raising revenue. Our state’s current approach is not helping workers get ahead, and it is not adequately funding education, health care and other vital services that help make widely shared prosperity possible. Alabama should consider numerous reforms to make its upside-down tax system more just, equitable and resilient.

Income tax: Because much of Alabama’s income tax structure is spelled out in the constitution, changing it would require changing the constitution. If Alabama’s income tax more closely followed the system of exemptions and deductions used at the federal level and in many other states, working families would have more money available to spend. That would boost the economy and improve their quality of life. The following proposals would help modernize our income tax and make it fairer:

• Make income taxes less regressive and more progressive.
• Reform out-of-date deductions.
• Eliminate the federal income tax (FIT) deduction.
• Review Social Security contribution deductions.
• Establish a state Earned Income Tax Credit (EITC).
• Gradually increase standard deductions.

Sales taxes: Alabama can modernize its sales tax system to make the tax less regressive and more reflective of current spending patterns. Policy changes that would advance these goals include:

• Modernize the sales tax on goods and services, including eliminating the grocery tax.
• Expand the sales tax to include more services and digital goods.
• Adopt a progressive approach to taxing services.
• Target exemptions for essential goods and services.
• Regularly review and adjust sales tax rates.
• Conduct a cross-state comparison.

Property taxes: Numerous property tax reforms would help restore balance to Alabama’s upside-down tax system. Large landholders would pay more, while small-scale farmers would pay less. And Alabamians’ overall property taxes still would remain below the national average. These reforms include:

• Evaluate and update the state property tax rate.
• Increase overall property tax rates.
• Protect homeowners with low incomes by increasing the homestead exemption.
• Protect small-scale farmers by creating a “farmstead exemption.”
• Adjust current use formulas to make them fairer.

Business taxes: A number of changes to Alabama’s business taxes could make them fairer and increase the amount of money for vital services, which businesses benefit from as much as individuals and families. These include:

• Remove the deduction for federal income tax payments and reduce the corporate income tax rate to 6%.
• Raise the cap on the business privilege tax so the wealthiest corporations will compete more fairly with smaller ones.
• Adopt combined tax reporting for businesses and their subsidiaries.
• Restore Alabama’s three-factor apportionment formula for calculating corporate income tax liability.
• Decouple Alabama’s business taxes from the federal tax code so that tax breaks or increases given by Congress do not automatically apply to state business taxes.
• Limit tax incentives for luring companies to Alabama.

New rules: What to watch for in new tax proposals

We can use four criteria to assess plans to improve Alabama’s taxes:

1. Fairness: Do they lower taxes for those who pay too much and increase taxes for those who pay too little?

• Will wealthy people and highly profitable companies pay their fair share? Alabamians with low incomes pay more than twice the share of income that the top 1% pay in state and local taxes.
• Will new plans tax low-paid workers deeper into poverty? Hurdles in Alabama’s constitution make it hard to raise new revenue through income or property taxes. But it’s easy to increase sales taxes, driving “the least of these” deeper into poverty and forcing them to shoulder an even greater share of the cost of the public services that benefit us all.

2. Adequacy: Do new plans meet the needs of a growing population?

• Do the plans help end the state’s structural deficit? Simply put, will they pay the bills? Stagnant income sources can’t keep pace with rising costs. One way to keep up with the changing times would be to extend our sales and use taxes to cover the services that account for an increasing share of consumer spending. We also could revise how we tax corporations so that the largest and most profitable pay their fair share of state taxes. And we can adjust our individual income taxes so that the wealthiest households pay their fair share while allowing more robust tax deductions for working families.
• Do the plans allow flexibility to address changing needs? As technology evolves and the population grows, Alabama must be able to keep up. Can our public schools educate our children properly when policymakers continue to redirect a growing share of their funding to private schools and homeschooling? Can one of the nation’s most limited Medicaid programs adequately serve aging and working populations? Can our overcrowded, brutal and inadequate prisons provide real rehabilitation and second chances for returning citizens? If we want a better tomorrow, we need to invest in it today.
• Does Alabama have adequate reserves? Or have we set too much aside in reserve that could be used to fund critical services for our residents? Do our multiple reserve accounts meet the needs of the people, or are they confusing and duplicative? We should take a careful look at our reserve funds to see if they serve our residents’ best interests or if they could be streamlined and revised.

3. Simplicity: Can people file a basic tax return?

• Is it easy to understand how taxes work? As lobbyists and special interests push new tax measures, our income tax form gets more complicated. Key principles can keep the system simpler.
• Does our tax system have confusing loopholes? A hodgepodge of tax breaks for some but not others makes our system inefficient. Worse yet, legislators sometimes create preferences for certain industries without revealing who would benefit.

4. Transparency: Can we see that everyone pays a fair share?

• Does the budget process let the public follow the money from tax collection through spending? Policymakers should set rules that ensure everyone pays a fair share in taxes. Do we know how much money is available for the state to spend on core services? And how can we ensure state agencies have what they need to provide vital services to families who are struggling to make ends meet?
• Is the state required to list tax breaks in a format that is clear and understandable? Alabama’s budgets reveal our values and priorities. But many tax breaks pushed through by powerful lobbyists can be virtually invisible. While Alabama provides a report on tax breaks, it’s difficult to read and understand. Most residents aren’t going to read audit reports to find tax breaks offered by state and local governments. Alabama’s tax expenditure report is a good first step, but it needs improvements to become truly accessible to the public.

Bottom line: Does our government reflect our values?

We need strong public services and inclusive public policies to meet the needs of our people. We create governments to promote the common good, to do together what we can’t accomplish alone – educating and protecting and planning and building a better future for everyone. If we hope to move forward, we have to change our broken, upside-down approach to taxes and budgets.

By getting involved, Alabamians can require their policymakers to be responsive to the needs in our communities. Our residents deserve a government that gives everyone a voice, an economy that offers everyone a chance to get ahead, and an Alabama that works for all of us.

The Alabama Tax and Budget Handbook

This glossary includes keywords used in The Alabama Tax and Budget Handbook, as well as other terms commonly encountered in tax and budget debates. Terms that are italicized in the definitions are defined elsewhere in this glossary.

act – a bill that has become law.

adjusted gross income – total annual earnings after subtracting certain expenses (such as qualified retirement contributions) but before subtracting deductions and exemptions. Compare taxable income.

ad valorem – a Latin phrase meaning “according to value.” See property tax.

Alabama Department of Revenue – the state agency that administers tax programs and collects taxes in Alabama. The federal tax authority is the Internal Revenue Service.

Alabama Trust Fund – a savings fund established to capture future revenues from sales of offshore drilling rights and from royalties on the resulting gas production.

apportionment – the process of determining what percentage of businesses’ profits are subject to a given state’s corporate income tax or other business taxes.

appropriation – an amount of money approved by the Legislature for a certain purpose. See also conditional appropriation; supplemental appropriation.

appraised value – an expert opinion of the current market value of a property.

assessed value – a tax assessor’s determination of property value, based on appraised value and lowered in Alabama by a property classification factor.

assessment ratio – a formula set by law to determine the portion of a property’s appraised value that is subject to tax. See also property tax.

balanced budget – an income and spending plan for which projected income is equal to or greater than projected spending. Alabama law requires the Legislature to balance the budget every year.

Big Mule – a political term coined in 1926 to describe influential wealthy industrialists and utility executives who influenced Alabama politics. See also Planters.

bill – a proposed piece of legislation to be considered by the Legislature for passage (or enactment) into law. See also act.

Black Belt – Alabama’s Black Belt area is part of a larger national Black Belt region that stretches from Texas to Virginia. This region has historically been home to “the richest soil and the poorest people” in the United States.

budget – a spending plan for a fiscal year. See also governor’s budget proposal.

Budget Stabilization Fund – a reserve balance that is set aside during good economic times to protect the state budget from cyclical changes in revenues and expenses that may occur during poor economic times.

business privilege tax – a tax on the net worth of companies doing business in Alabama. The business privilege tax replaced the franchise tax in 1999.

chamber – a deliberative assembly within a legislature that generally meets and votes separately from the legislature’s other chambers. In Alabama, a chamber refers to either the House of Representatives or the Senate.

circuit breakers – a targeted property tax reduction program that operates like an electric circuit breaker, which cuts off the flow of current before an electrical surge can cause damage. Circuit breaker programs account for ability to pay when calculating a property tax bill and cap property tax payments that exceed a certain percentage of income.

combined reporting – a tax practice that treats a “parent” corporation and its subsidiaries as one corporation for corporate income tax purposes. Many large corporations avoid taxes by artificially moving profits out of the states where they are earned and into states where they will be taxed either at lower rates or not at all. States that have adopted combined reporting can prevent many of these tax avoidance strategies.

conditional appropriation – an amount of money approved by the Legislature for a particular purpose only if funds become available later in the fiscal year.

conference committee – a legislative committee composed of House and Senate members that meets to reconcile differences in legislation that has passed both chambers.

corporate income tax – a tax on the net income of a corporation located in Alabama or deriving income from sources within Alabama.

credit (also called tax credit) – a direct, dollar-for-dollar reduction in taxes owed. A credit reduces the amount of tax owed on income, while a deduction reduces the amount of income that is subject to taxation.

current use – the valuation of certain qualifying properties at a reduced amount based upon their use as farmland or timberland.

decouple (also called de-link) – to break the connection between a state’s tax code and certain provisions of the federal tax code.

deduction (also called tax deduction) – an expense (such as a charitable gift or mortgage interest) subtracted from adjusted gross income while figuring taxable income. See also itemized deduction; standard deduction.

dependent – a person, usually a family member, who is supported financially by another person.

dependent deduction – an amount excluded from taxable income in Alabama to help offset a taxpayer’s cost to support a child or other dependent. On federal income tax returns, this reduction is claimed through a personal exemption.

discretionary funds – money that is available to spend on things that are not considered necessary but that may be useful.

earmarking – the practice of setting aside – through constitutional provision or statutory law – revenues from particular sources for particular purposes.

earned income – money received in payment for a job or through self-employment and reported to the Internal Revenue Service (IRS) and the state for tax purposes.

Earned Income Tax Credit (EITC; also called earned income credit or EIC) – a refundable credit for low-income taxpayers who earn income above a given amount. “Refundable” means taxpayers get the full amount of the credit no matter the size of their tax bill. State EITCs often are set at a percentage of the federal EITC and can help offset the regressive effects of sales taxes.

economic incentives – cash or near-cash assistance (such as tax benefits, reductions, subsidies and rebates) provided on a discretionary basis to attract or retain business operations.

Education Trust Fund (ETF) – state revenues set aside for public education and related services at all levels. Compare General Fund.

Education Trust Fund Budget Act – annual legislation that provides the spending plan for federal, state and some local revenues set aside for education. Compare General Fund Budget Act.

Educational Opportunities Reserve Fund – a fund created in 2023 that could help offset future shortfalls in the state’s Education Trust Fund.

excise tax – a special sales tax that is levied on the purchase of a particular type of product or service, such as alcohol, tobacco or gasoline.

executive amendment – suggested changes to a vetoed bill that the house in which it originated must make for the governor to sign it into law. See veto.

Executive Budget Office (EBO) – a division of the state’s Department of Finance that prepares the governor’s budget proposal, administers legislative appropriations, estimates revenues for budget preparation and assists in drafting appropriation bills.

exemption – a portion of income on which no tax is imposed – usually intended to help shield the basic costs of living from taxation. See also farmstead exemption; homestead exemption; personal exemption.

farmstead exemption – a proposed tax code provision that would exempt a certain share of assessed value for calculating property tax on an owner-occupied farm. See also homestead exemption.

federal income tax (FIT) deduction – a deduction that allows taxpayers to write off their federal income tax payments on their state income taxes. Alabama is the only state to allow a full federal income tax deduction.

federal match – refers to a cost-sharing mechanism in which a portion of a project’s costs are paid by federal funds. Matching funds are typically stated as a percentage of the total project cost.

federal poverty measure – See poverty line.

fee – a fixed charge for a privilege or service.

fiscal note – an analysis of how a bill would increase or decrease the revenues available to fund state or local services. The Fiscal Division of the Legislative Services Agency prepares fiscal notes for the Alabama Legislature.

fiscal year (FY) – an annual accounting period. Like the federal fiscal year, Alabama’s fiscal year runs from Oct. 1 through Sept. 30 and is designated by the calendar year in which it ends. For example, fiscal year 2040 will start in October 2039.

flat tax (also called proportional tax) – a tax that is levied at the same rate on all levels of income. Compare graduated tax; progressive tax; regressive tax.

General Fund (GF) – state revenues that are not earmarked and that provide for most public services except education. Compare Education Trust Fund.

General Fund Budget Act – annual legislation that provides the spending plan for federal and state revenues supporting all non-education programs.

governor’s budget proposal – a suggested allocation of state money that the governor presents to the Legislature by the second legislative day of each regular session.

graduated tax – a type of progressive tax in which the tax rate is higher as the value of the taxed income or item increases.

gross income – the sum of all wages, salaries, profits, interest payments, rents and other forms of earnings, before any deductions or taxes. Compare adjusted gross income; taxable income.

home rule – implies that each level of government has a separate realm of authority. The state constitution could grant home rule, which would provide more ability for local governments to address local issues.

homestead exemption – a provision in the tax codes of Alabama and other states that reduces the assessed value of a primary residence by a set amount for the purpose of calculating property tax. See also farmstead exemption.

income tax – a tax on earned income and unearned income.

inflation – growth in the price level of goods and services, measured as an annual rate.

Internal Revenue Service (IRS) – the federal agency responsible for collecting taxes and administering tax programs. Alabama’s state tax authority is the Alabama Department of Revenue.

itemized deduction – an individual expense (such as mortgage interest, charitable gifts or payments for medical services) that lowers taxable income. Taxpayers itemize if their deductions exceed the standard deduction.

law – a legal document (constitution, act, regulation, ordinance, etc.) that sets rules governing a particular activity.

Legislative Services Agency (LSA) – a nonpartisan state agency that provides objective fiscal analysis (including information about tax and budget matters), legal advice and bill drafting services to Alabama legislators.

legislative session – a period when the Legislature meets, either in regular session or in special session.

levy – to impose a tax or fee on a person, business or other entity.

Lid Bill – a 1978 amendment to the Alabama Constitution that lowered the assessment ratio for farm, forest and residential property to 10% of appraised value, established a current use provision and capped the amount of property tax that can be collected overall.

local tax – a tax imposed by a local government to fund services such as water treatment, fire protection and garbage collection.

Medicaid – a health insurance program, funded by federal and state governments and operated by the state, for people with incomes below a certain level – primarily children, older adults, and people with disabilities in Alabama. Compare Medicare.

Medicare – a federal health insurance program for adults aged 65 and older and for people with disabilities. Compare Medicaid.

mill – one-tenth of a cent. A one-mill tax is equivalent to $1 per $1,000 of value.

millage rate – the number of mills that a locality or state levies on property within its authority.

payroll tax – a tax on wages that is used to finance unemployment insurance, worker compensation, disability insurance, Social Security and Medicare.

personal exemption – an amount excluded from the taxable income of any taxpayer who cannot be claimed as a dependent by another taxpayer.

Planters – members of the Legislature, typically from the Black Belt, who controlled the Alabama Legislature along with the Big Mules in the early 1900s.

poverty guidelines – standards issued by the U.S. Department of Health and Human Services to measure eligibility for certain federal programs. The guidelines are based on the poverty thresholds but are simpler and more current.

poverty line (formally called the federal poverty measure) – a U.S. government standard used to classify people as “poor.” There are two versions: poverty thresholds and poverty guidelines. Both versions vary with family size and ages.

poverty thresholds – standards issued by the U.S. Census Bureau to estimate the number of people living in poverty. The thresholds, issued in late summer for the previous calendar year, are more detailed than poverty guidelines.

progressive tax – a tax that requires people who make more money to pay a bigger share of their income than those who make less. A tax can be made progressive by the use of graduated rates, exemptions, deductions or credits. See also graduated tax; compare regressive tax.

property classification – a set of categories of real estate defined by state law for the purpose of assigning assessment ratios for property tax.

property tax (also called ad valorem tax) – a tax that a state or local government levies on the assessed value of property.

proportional tax – See flat tax.

proration – the process of cutting agency budgets equally across the board when revenues fall short of expectations.

Public School Fund – a state fund that helps pay for public school construction and renovation projects. The Public School Fund receives 3 mills of revenue from the state property tax.

rainy day fund (also called reserve fund) – money set aside in a budget or borrowed from a government account for emergency use.

Reconstruction – the period after the Civil War during which attempts were made to redress the inequities of slavery and its political, social and economic legacy and to solve the problems arising from the readmission to the Union of the 11 states that had seceded.

regressive tax – a tax that requires people who make less money to pay a bigger share of their income than people who make more money. Compare progressive tax.

regular session – the annual period when the Alabama Legislature meets, limited to 30 meeting days within a period of 105 calendar days beginning in the first quarter of the year. Compare special session.

reserve fund – See rainy day fund.

revenue – money collected by a government from the public in taxes and fees.

revenue forecast – predicts revenue over a certain time period, usually one year.

Rolling Reserve Act – a 2011 state law that limits Education Trust Fund spending based on average revenue growth in prior budget years. Revenue in excess of the spending cap goes toward an account designed to prevent proration or toward capital expenses like school bus purchases or school building repairs.

sales tax – a tax that a state or locality levies on the retail price of an item, collected by the retailer.

simplified sellers use tax (SSUT) – allows eligible sellers to participate in a program to collect, report and remit a flat 8% sellers use tax on all sales made into Alabama.

sin tax – a tax that is levied on products or activities that some people consider to be vices, such as cigarettes, liquor or gambling.

Social Security – a social insurance program that provides most of the nation’s workforce with retirement, disability and survivor benefits.

special sales tax – a tax charged on certain goods or activities that is higher than the normal sales tax.

special session – a convening of the Legislature, limited to 12 meeting days within 30 calendar days, that the governor calls for a specific purpose. Any measures not included in the “call” require a two-thirds majority vote in both chambers to pass. Compare regular session.

standard deduction – a fixed amount that taxpayers who do not claim itemized deductions can subtract from adjusted gross income to reduce their taxable income.

structural deficit – the inability of a government’s revenue system to keep up with normal cost increases resulting from factors like inflation and population growth. The General Fund has had a structural deficit for decades.

substitute bill – a version of a bill offered by a legislative committee. If adopted, the substitute replaces the original bill or resolution.

supplemental appropriation – an amount of money approved by the Legislature to meet current needs that were not met in the budget passed in an earlier session.

Supplemental Nutrition Assistance Program (SNAP) – a program that provides food assistance benefits to help people with low incomes supplement their grocery budgets.

tax – an amount charged by a government on income, goods, property, services or activities to help pay for public services like education and public safety.

tax expenditure – potential revenue forgone through tax credits and exemptions.

tax rate – the percentage of a given level of income or value paid in taxes.

tax threshold – the lowest income level subject to the income tax.

taxable income – amount of income subject to income tax (after subtracting all deductions and exemptions). Compare adjusted gross income.

unearned income – income (such as dividends, interest or rental fees) that does not result directly from the recipient’s labor. Compare earned income.

use tax – a tax on goods bought outside a locality or state for use inside it. The use tax is equivalent to a sales tax on such goods. It is commonly discussed in the context of internet or mail-order purchases.

utility property – all property and assets of a company and its subsidiaries used principally in electric, natural gas and water operations.

veto – the power of the governor to refuse to approve a bill and thus prevent its enactment into law. In Alabama, if a majority of the members elected to each chamber vote to approve a vetoed bill as the Legislature passed it – a process known as overriding a veto – the bill becomes a law despite the governor’s veto. See also executive amendment.

The Alabama Tax and Budget Handbook