We’re all in this together. All of us – people of every race, gender, age, income and background – benefit from a network of services from our local, state and national governments. From garbage collection to fire protection, from roads to schools, from public health to public safety, our tax dollars support the daily upkeep of our common good across Alabama.

The Alabama Tax and Budget Handbook is a guide to help make our state’s tax and budget processes more accessible and understandable. The handbook provides an overview of state finances and answers questions that affect every Alabamian: What do our tax dollars pay for? How does state spending work? Where does the state get its money?

The handbook looks at how those functions measure up – in relation to residents’ needs and abilities, in fairness and equity for all residents, and in comparison to the performance of other states. And the handbook offers ideas for making Alabama’s finances fairer, simpler, more adequate for meeting our needs and more easily communicated to the public.

By learning about these processes and advocating for positive change, Alabamians can require their policymakers to be responsive to the needs in our communities. Together, we can ensure 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.

Read the handbook

Use the links in the table of contents below to navigate through the full online version of The Alabama Tax and Budget Handbook. This navigation also will be available at the bottom of each section page.

For an overview of the handbook’s major themes and key recommendations, read our news release here.

To read the full handbook, download a PDF copy here. You also can access the PDF by clicking the “Download” button at the top of this page.

Order a print copy of the handbook

You can request print copies of the handbook, and we hope you do! Print copies are available free of charge, but we do ask you to consider a donation to help us cover printing and distribution costs.

• If you are able to donate for a print copy, you can make your request and donation in one place on this form.

• To request a print copy at no cost, please fill out this form.

About this handbook

Alabama Arise published the first edition of The Alabama Tax and Budget Handbook in 2005 to help educate the public about how our state’s taxes and budgets work and how they affect our everyday lives. Arise published a second edition in 2015 and now a third edition in 2026. This third edition includes changes that have occurred in the decade since the previous edition – and reflects our ongoing commitment to building a better Alabama for all.

This handbook concludes with a glossary of terms commonly encountered in tax and budget debates. Hyperlinked terms that appear in boldface type throughout the handbook are defined in the Alabama Tax and Budget Glossary.

To request a presentation about this handbook’s contents, email info@alarise.org or call the Alabama Arise office at 334-832-9060.

Table of contents

The common good

We’re all in this together. All of us – people of every race, gender, age, income and background – benefit from a network of services from our local, state and national governments. From garbage collection to fire protection, from roads to schools, from public health to public safety, our tax dollars support the daily upkeep of our common good.

The 50 state governments are vital links in this network. It’s a solemn trust: Each state is responsible for ensuring the safety, general well-being and education of its people. And each state government carries out this responsibility in its own way.

As Alabamians, many of us studied our state government in fourth grade and learned a little more about it in other classes. But until we’re out making a living, paying taxes and voting, these lessons may seem disconnected from our everyday lives. The Alabama Tax and Budget Handbook is designed to make that connection. The handbook breaks down state finances into basic functions that affect every taxpayer: What do our tax dollars pay for? How does state spending work? Where does the state get its money?

The handbook also looks at how those functions measure up – in relation to residents’ needs and abilities, in fairness and equity for all residents, and in comparison to the performance of other states. And the handbook offers ideas for making Alabama’s finances fairer, simpler, more adequate for meeting our needs and more easily communicated to the public.

This is the third edition of the handbook. Alabama Arise developed the first handbook in 2005 and updated it in 2015 to reflect changes in the 10 years since the original edition. This new edition incorporates recent changes to state law and expands our discussion of Alabama’s budgeting process. This edition also reflects Alabama Arise’s commitment to racial equity by delving into the racist history of our tax system and exploring the disparate impact of budget and tax decisions on Alabama’s residents of color.

What are the origins of Alabama’s tax structure?

Alabama’s deeply regressive and upside-down tax system is the legacy of the state’s history of slavery and segregation. It’s a history and a tax system that Alabama shares with many of our neighboring Southern states. And it’s a history and a tax system “linked to [S]outhern states’ continuing underinvestment in public services with a willful austerity that inhibits opportunities for the region’s residents to thrive,” according to the Institute on Taxation and Economic Policy (ITEP).

Immediately following the Civil War and the end of legalized slavery, Alabamians elected many Black citizens to the Legislature. These new lawmakers adopted a new state constitution that, according to historian Wayne Flynt, was “devoted to raising additional revenue, providing universal education [and] expanding state services[.]” During this period, these Black legislators and many white allies made significant investments in public services across Alabama, particularly education. These attempts to expand opportunities for everyday citizens led to tremendous racial and political tensions.

After the Reconstruction period ended, a newly empowered white-majority state government wrote a new constitution that segregated schools, slashed taxes, reduced public services and limited the political power of Black people. The 1901 constitution cemented these provisions, and more, in place. This constitution was designed explicitly to disenfranchise Black people, reinstitute the racist system of white supremacy and limit the state’s ability to tax a major source of white wealth: land.

Alabama’s 1901 constitutional convention intentionally excluded Black representatives. Instead, the Planters and Big Mules dominated the convention. The Planters were large landowners, mostly from the Black Belt. The Big Mules were industry leaders in the banking, railroad and industrial sectors. These two groups joined forces at the convention, where the main question was whether the new document would strip voting rights only from Black people or if it also would restrict the influence of poor white people.

Delegates chose the latter option and wrote a constitution that sought to perpetuate the system of white supremacy that had dominated Alabama prior to Reconstruction. The delegates did not try to hide their ultimate goal in drafting the 1901 constitution. As the convention president said during his opening address: “And what is it that we want to do? Why, it is, within the limits imposed by the [f]ederal Constitution, to establish white supremacy in this [s]tate.”

Many newspapers warned that the 1901 constitution, if ratified, would result in inadequate funding of Alabama’s public education system. Some delegates, however, intentionally sought to deny the right to a public education, believing that providing Black people with a quality education would threaten the system of white supremacy. Many delegates also believed Black people would gain the most from services like public schools. Therefore, the 1901 constitution’s drafters ensured that generations of policymakers would lack both the money and the power to invest adequately in services that might disproportionately benefit Black people. These racist impulses, combined with protections for the property interests of the Planters and Big Mules, resulted in a severe cap on property taxes. That cap limited available funding to support public schools and other services.

During the Civil Rights Movement, activists and lawyers were able to get many of the overtly racist sections of the 1901 constitution stricken. And in 2022, Alabama voters approved a recompilation of the constitution that removed many of these stricken sections entirely. But mounting successful challenges to the tax policies embedded in the document has proved much harder. For example, the 1901 constitution capped state property taxes at 6.5 mills, a limitation that is still in effect today. The constitution also limited the home rule of counties and cities, including their ability to increase their own local property taxes.

There is no question that the cumulative effect of these property tax limitations has been to restrict funding for public education, especially in rural counties in Alabama’s Black Belt, disproportionately harming Black children. To this day, the state constitution concentrates taxation power in the Legislature, then and now dominated by white representatives.

In 1939, the Legislature passed a law creating a 2% state sales tax, which has increased to 4% over time. The state constitution requires counties to get the Legislature’s approval to increase many categories of sales taxes, just like with property taxes. Cities, meanwhile, can increase sales taxes without having to ask for legislative permission. But the constitution makes it much harder for cities and counties to increase property taxes, requiring the Legislature’s approval and then approval in a voter referendum.

Because it’s easier for localities to adjust sales taxes than property taxes, cities and counties often rely heavily on sales taxes to fund local services like roads and fire protection. And because sales taxes are highly regressive, their impact lands disproportionately on Alabamians with the lowest incomes.

The tax that best offsets regressive taxes like sales taxes is the state income tax. In 1935, Alabama approved a graduated income tax that was quite progressive. That year, when the state began taxing incomes of $3,600 or more for a family of four, teachers earned around $500, and only about 7,000 people in Alabama earned enough to be subject to the new tax. But since then, income tax brackets haven’t kept up with inflation. What originally was enacted as a progressive tax has now become essentially a flat tax that no longer offsets the regressive effects of state and local sales taxes.

Alabama’s tax system continues to worsen racial and ethnic income disparities, ITEP found in a 2020 unpublished analysis. Black and Hispanic families in our state face higher effective tax rates than white families but have lower average incomes. ITEP found that Black families paid 7.8% of their incomes in state and local taxes, compared to a statewide average of 7.3%. The organization’s analysis concluded that Alabama was among the worst performing states in racial inequities embedded in the tax system.

Alabama’s current tax structure was created by the same 1901 constitution that sought to entrench our state’s long history of segregation and racial discrimination. To make our tax structure more adequate and fairer, we will have to confront and address the impulses that drove these decisions made more than a century ago.

How does state spending work?

One state, two separate budgets

Of the Legislature’s $39.1 billion in total appropriations for fiscal year (FY) 2022, about $20 billion came under the Education Trust Fund (ETF) Budget Act for education-related services. Another $19 billion came under the General Fund (GF) Budget Act for all other services. Lawmakers also separately appropriated about $40 million in tobacco settlement money under the Children First Trust Fund to GF and ETF agencies (not shown on the chart). About 69% of total appropriations were earmarked, or set aside for a specific purpose, before lawmakers allocated them. Another 23% were designated for the ETF, though not earmarked for a particular purpose within it. Altogether, 92% of state revenue – everything outside the $3.1 billion General Fund – was restricted to some extent in how it could be spent.

It takes significant state and federal money to keep Alabama’s vital services running. Most of this money flows through the State Treasury. State agencies use the Treasury like a bank account. State and federal dollars appropriated by the Legislature are deposited there, and each agency draws out the money it’s been authorized to spend. Every penny the state spends goes through a formal budget process that involves the Legislature, the governor and state agencies.

Each year, the Legislature authorizes almost all state funding by passing two major pieces of legislation: the Education Trust Fund (ETF) Budget Act, which funds education-related services, and the General Fund (GF) Budget Act, which funds everything else the state does. (Lawmakers also pass several smaller budget bills annually.) Both major budgets include state tax revenues, as well as other state revenues like fines and fees and federal dollars. Each budget is divided into two parts: the smaller part controlled by the Legislature (discretionary funds) and the more significant part set aside by law for particular uses (earmarked funds). All federal funds are considered earmarked because the federal government, not the Legislature, decides where they can be spent. Because the Legislature must spend every dollar in the ETF on education-related programs, only the discretionary part of the General Fund budget is not earmarked.

The annual Education Trust Fund Budget Act:

• Provides financing for all state education spending.
• Can be used only for education. Most funds are earmarked for particular education expenses, but lawmakers have some discretion over the areas of education on which the rest is spent.
• Often is referred to as simply the Education Trust Fund (ETF).

The annual General Fund Budget Act:

• Provides financing for all non-education programs.
• Primarily appropriates earmarked federal and state funds, including state gasoline tax revenues, which have been set aside for roads, bridges and traffic enforcement since 1952 under Amendment 93 of the state constitution.
• Includes the only state revenues that are not earmarked at all.
• Often is referred to as simply the General Fund (GF).

What state dollars pay for: Things that benefit all of us

Education, health care, public safety and other vital services support economic growth and make our state a better place to live and work. Alabama spent $6.5 billion from the Education Trust Fund on K-12, colleges, universities and other education-related services in FY 2022. The same year, Alabama provided $2.2 billion in funding for Medicaid, mental health, courts and other non-education services from the General Fund. Of the total $8.8 billion, more than 75% of the funding went to K-12 schools and universities, easily exceeding the amount that went to Medicaid, corrections and other General Fund services. Here’s a look at what state dollars supported:

In FY 2022, Alabama spent $6.5 billion from the Education Trust Fund, mostly on K-12 and higher education. This easily exceeded the amount that went to Medicaid, corrections and other vital services from the General Fund.

In passing the General Fund Budget Act each year, the Legislature is most concerned with the discretionary funds (dollars that are not earmarked) that make up what legislators call the General Fund (GF). Even though this money amounts to only a small portion of total GF Budget Act spending, it’s the portion that lawmakers are free to debate and divide up to help meet the state’s many competing needs. The Legislature seeks input from agency leaders and the general public in assessing these needs.

In most states, the Legislature has relatively wide latitude in deciding how to spend the money from state taxes. But Alabama lawmakers’ choices are much more limited. Over the years, Alabama voters have placed severe restrictions on how tax dollars are used by designating them (in constitutional amendments and statutes) for specific purposes. While this earmarking can help safeguard against misuse of state funds, it also can prevent legislators from creating a budget that adequately meets current needs for education, public health and other services that improve lives and build Alabama’s economy.

Tax expenditures reduce funding for essential needs

State tax incentives, tax credits and tax exemptions significantly affect state budgets by reducing the amount of money the Legislature can appropriate. These tax expenditures benefit specific companies, businesses or individuals and can total hundreds of millions of dollars annually. The Legislature routinely passes dozens of bills each year that exempt items such as farm supplies from sales taxes, direct tax credits to new and existing businesses, and create broad tax credits that reduce essential revenue.

One example of a tax credit with a significant budget impact is the CHOOSE Act, enacted in 2024. The law provides eligible parents with up to $7,000 per child each year for private schools and up to $2,000 per child each year for homeschooling. Those credits are available even for parents whose children never attended a public school. The CHOOSE Act will divert between $150 million and $200 million a year from public schools through 2027-28. That amount is enough to pay for up to 2,500 teachers every year. And the cost could grow in future years if lawmakers increase or remove the income cap for eligibility.

Earmarked vs. appropriated funds

Some major agencies in Alabama depend significantly more on earmarked funds than on appropriations from the Legislature. This ensures stable funding for services, but it reduces the Legislature’s ability to create a budget meeting current needs.

When revenues fall below the amount needed to maintain services, the state must choose from a short list of options: Find one-time revenue sources, tap reserve funds, cut services or raise taxes. The state constitution prohibits Alabama from using money in any earmarked account to pay for other services. (Imagine not being able to use the money you budgeted for a birthday party to have a leaky roof repaired!) Alabama does have several “rainy day” reserve funds that have helped prevent proration, or mid-year service cuts, during the last decade. The most significant of these came in the Rolling Reserve Act, which was passed in 2011 and revised several times since. The law caps annual education spending and moves any remaining funds into reserve accounts and an account that can be used for non-recurring expenditures.

Most other states have much more flexibility in allocating spending for different programs. Reducing earmarking would make Alabama’s budgets more responsive to changing needs and priorities. But most earmarking changes would require amending the constitution or writing a new one. Constitutional amendments require voter approval, which may be difficult to get because many voters support earmarking as a check on legislative power.

Racial inequity at a glance

Alabama’s seven constitutions have recognized the importance of public education and, until 1955, encouraged education. Following the U.S. Supreme Court’s landmark Brown v. Board of Education decision, however, Alabama revised its constitution to say that “nothing in this Constitution shall be construed as creating or recognizing any right to education or training at public expense.” This was a direct act of defiance intended to maintain a racial hierarchy and the vestiges of white supremacy in Alabama. Though courts ruled school segregation unconstitutional, subsequent cases have failed to establish a clear right to equitable education funding throughout the state. Education funding in Alabama still varies widely based on the wealth, and racial makeup, of local communities – especially when it comes to revenues from local property taxes.

Where does the state get its money?

1. From us – More than half of all the money Alabama takes in every year comes from taxes and fees that individuals and businesses pay. The lower graph on in the image above shows the share of this revenue that each state tax garners. (Note: The graph does not include local tax revenues, which in recent years have equaled a little less than half of the amount collected by the state. In Alabama, as in most other states, the property tax is mainly a local tax.) For a look at how state taxes work, see the image below.
2. From the federal government – More than 45% of Alabama’s budget dollars ($2.25 of every $5 the state spends) comes from Washington, D.C. This is higher than in most other states. On average, states receive 35% of their budgets from the federal government. (Worth noting: During the COVID-19 pandemic, states witnessed an increase in federal financial support. Historically, only about one-fourth to one-third of states’ budgets have come from the federal government.) These are dollars that the federal government provides to help the state support basic services like education, health care and transportation. Most federal grants require a state contribution: When Alabama spends a certain amount on a particular area, the federal government will provide “matching” funds. The more the state spends, the bigger the federal match (up to a point).

Because Alabama’s state spending is so low, we often contribute little more than the minimum amount necessary to receive federal matching funds. In some areas, we forfeit the federal match altogether by failing to provide a state match. Most other states take better advantage of the match by contributing more state dollars to federally supported programs. A prime example: Alabama is one of only two states providing no state money for public transportation. That means our state forfeits tens of millions of federal dollars every year. It’s money that could support buses, trains, ride-sharing services and other efforts to help thousands of families stay connected. Even a modest state investment would help Alabama draw down tens of millions of federal dollars to help families get to work, the doctor’s office or wherever else they need to go.

Because Alabama’s state spending is so low, we often contribute little more than the minimum amount necessary to receive federal matching funds.

In Alabama, some state programs and services have more adequate funding than others, and some years have more adequate funding than others. Tax revenues that grow with the economy (major taxes on consumers and workers, such as sales taxes and income taxes) are largely earmarked for the ETF. This imbalance has improved in recent years because revenues from internet sales taxes (called the simplified sellers use tax) have increased, providing new “growth taxes” for the General Fund. In addition, post-pandemic revenue growth has allowed lawmakers to continue funding state services while enacting a one-time income tax rebate and a permanent reduction in the state sales tax on groceries. These revenue increases may not be sustainable in the long term, however, and income taxes and most state sales taxes remain earmarked for education.

Other state services under the GF continue to get the leftovers – an assortment of minor taxes, interest and fees, many on businesses, that often grow at a sluggish rate. The slow growth keeps services like Medicaid and corrections permanently shortchanged as costs continue to grow. There’s also a disadvantage to the ETF’s reliance on sales and income taxes: In bad years, they can shrink. Many states, including Alabama, set aside money in good years in a rainy day fund to help them in bad years.

Alabama has created rainy day funds by drawing from the Alabama Trust Fund – which gets revenue from offshore oil and gas drilling – and by using money that exceeds the ETF spending cap under the Rolling Reserve Act for school infrastructure and one-time expenses like buses and textbooks. Alabama also has established a Budget Stabilization Fund in the ETF where revenues in excess of the appropriation cap are transferred and a General Fund Budget Reserve Fund in which up to $100 million can be deposited to prevent proration. In 2023, the Legislature created a new education reserve fund called the Educational Opportunities Reserve Fund.

Despite these improvements, Alabama’s inadequate budgets for core services point to a deeper problem that can’t be fixed easily: The state doesn’t have enough money each year to support state services adequately or to expand services to meet a growing population or address new needs. This built-in shortfall is called a structural deficit. A more adequate tax system would bring in enough stable revenue to help prevent shortfalls and give legislators more leeway to respond when they occur.

The structural deficit shows how our state’s fiscal system has failed to keep up with changing times. In the budget crisis of 1933, the Legislature began dealing with revenue shortfalls by using proration, or cutting current spending (except for teacher and state employee salaries) across the board. By requiring the governor to use proration to avoid deficit spending, the law spares legislators from making tough decisions on which services should bear the brunt of cuts. For schools, though, the effect can be dramatic: Ordered in June to cut $10 million in spending for a budget year that ends Sept. 30, a system may be forced to choose between replacing worn-out roofs or replacing old math books. Alabama has used proration 18 times since 1975 but has not had to prorate the education budget since the Rolling Reserve Act was passed in 2011. However, the state had to borrow from the Alabama Trust Fund during recent difficult budget years and had to draw money from the ETF Budget Stabilization Fund during the pandemic recession.

Racial inequity at a glance

Alabama’s funding of our court system relies heavily on money collected from the users of the system. These fees include civil and criminal court costs charged against people – disproportionately Black – caught in the legal system. Some of these court costs are sent to the state General Fund (GF) and help fund local courts and related agencies. In 2022, Alabama’s state court cost collections were more than $60 million. While the exact appropriation of these fees is unclear, the $60 million collected equaled 28% of the GF appropriation to Alabama’s trial courts.

This heavy reliance on court costs to support the justice system negatively impacts the state. It encourages law enforcement and courts to focus on collecting revenue to support their operations. People of color and people with low incomes are disproportionately caught up in the justice system, in large part due to overpolicing in these communities (rather than either group committing crimes at rates higher than their counterparts). As a result, the weight of funding our courts falls heaviest on the people least able to pay. A 2018 study by Alabama Appleseed found that more than 80% of people surveyed gave up necessities like rent, food, medical bills and child support to meet their court debt.

The Alabama state budget process

Each year, the governor prepares a financial plan and introduces two major budget bills: a General Fund (GF) bill and an Education Trust Fund (ETF) bill. In the plan, the governor outlines budget priorities, revenue projections and updates on the past fiscal year, which runs from Oct. 1 to Sept. 30. The governor drafts the plan after considering each state agency’s programmatic and financial objectives. The plan also includes recommended revenue measures to ensure a balanced budget. The governor must present a proposed budget to the Legislature on or before the second legislative day of each regular session of the Legislature.

After receiving the governor’s budget proposal, the Legislature:

• Considers the governor’s recommended plan.
• Adopts alternatives or revisions to the governor’s plan.
• Passes legislation to authorize budgets for the next fiscal year.

After the introduction of the governor’s plan, the Legislature has until the end of a regular session to pass the budgets. This period of approximately three months – a comparatively short timeframe for consideration and passage of the state’s multi-billion-dollar GF and education budgets – is the critical period for public comment on the state’s spending priorities. During a regular session, the Legislature meets (usually on Tuesdays and Thursdays) for a maximum of 30 meeting days during a period of 105 calendar days. If lawmakers fail to pass one or both of the budgets during the regular session, the governor may call the Legislature back for a special session.

Both the House and Senate have separate budget committees that review and vote on the ETF and GF budgets. These budget committees often make significant changes to the governor’s proposed budget. State agencies, the governor’s Department of Finance and the Legislative Services Agency (LSA)’s Fiscal Division appear before these subcommittees with reports and recommendations. These committee hearings are the one of the best times for Alabamians to voice their opinions. The committees most often meet on Wednesdays.

Alabamians can voice their opinions on the budgets by:

• Calling their legislators’ district or Montgomery office number.
• Writing a letter.
• Meeting with their legislators or a member of their staff.
• Sending an email.
• Requesting a public hearing on a budget expenditure.
• Testifying at a scheduled public hearing on a budget.

Each chamber discusses and votes on the budget bills separately. It is common practice for one major budget to “originate” in either the House or Senate and the other major budget to begin in the other chamber. The committees considering the budgets review the governor’s proposals and any changes approved by the other chamber. Then they make changes themselves and send revised budget bills (usually in the form of substitute bills) to the chamber floors for additional modification and votes. Usually there are differences between the budget bills passed by the House and by the Senate. In these cases, the bills often are referred to a joint committee (called a conference committee) where differences can be resolved. Each chamber then must approve the conference committee’s report before sending the final legislation to the governor for a signature, veto or executive amendment. If the governor signs the budget bill into law, or if the Legislature overrides the governor’s veto, the bill becomes an act.

How could Alabama improve its budgeting process?

In 2014, the Center on Budget and Policy Priorities rated Alabama as “low” in using fiscal planning tools that could improve our budgeting process. While the analysis had some limits and the state has made some improvements since then, Alabama still fails to use many tools available in other states that could improve how we write our budgets. Some of the areas where Alabama could improve its budgeting process include:

• Forecast revenues into the future. Alabama passes a future budget based, in large part, on revenues collected during the current budget year. State leaders often have a good idea of what economic conditions and revenues may look like in the next year but have no formal process to forecast revenues for several years. A more deliberate approach involving outside experts could help Alabama plan for future budgets and needed revenue.
• Prepare fiscal notes with multiyear projections. Bills considered by the Legislature that will cost or save the state money must be accompanied by a fiscal note from the LSA describing the bill’s financial impact on the state. These fiscal notes, however, are often vague and limited in detail. More robust data would help lawmakers understand the financial implications of legislation they’re considering.
• Get a stronger current-year baseline on services. Alabama’s budgets are based in part on requests prepared by state agencies and submitted to the governor each fall. These plans, however, are not readily available to the public and often lack detailed analysis of the cost of existing and anticipated services. Stronger and more specific estimates of the cost to extend current services into future years would help the governor and Legislature determine future revenue needs. In addition, greater transparency would allow Alabamians adequate time to weigh in, strengthening elected officials’ ability to ensure they are adequately responding to and funding the needs of the people.

In 2014, the Center on Budget and Policy Priorities rated Alabama as “low” in using fiscal planning tools that could improve our budgeting process.

• Seek independent consensus revenue forecasts. The Executive Budget Office (EBO) prepares revenue forecasts for the governor, and the Legislative Services Agency’s Fiscal Division prepares them for the Legislature. In past years, these forecasts could diverge widely between the House and Senate. More recently, forecast differences between the LSA and EBO have been minor, and the two chambers generally agree on their revenue projections. But Alabama still should include outside, independent experts in their revenue estimates, such as experts from the state’s major universities. Including outside experts in the revenue forecasting process could make the process more objective and reduce politicization.
• Enhance fiscal flexibility through gradual earmarking reform. Make Alabama’s budget process more agile and responsive to the state’s evolving needs and priorities by pursuing a measured approach to earmarking reform. Policymakers should seek to strike a balance between preserving the benefits of earmarking and providing the state’s budget with necessary adaptability. This approach could include doing the following:
  • Initiate a comprehensive review of Alabama’s existing earmarking practices. Identify programs and areas where earmarking can be gradually reduced or modified to allow for greater spending flexibility. This analysis should take into consideration both short-term budgetary requirements and long-term strategic goals.
  • Consider a phased approach to earmarking reform. Begin by identifying non-essential or outdated earmarks that can be modified without requiring constitutional amendments. This approach would allow for incremental changes that could lead to a more flexible budget over time.
  • Implement pilot projects to showcase the positive outcomes of earmarking reform in specific sectors. Highlighting the improved allocation efficiency, responsiveness to pressing issues and overall positive impact on the state’s well-being would be important steps toward broader reform.

How do state taxes work?

Most people would consider a tax system to be unfair if those who earned less paid a higher percentage of their income in taxes than those who earned more. But that’s exactly how regressive taxes work.

As we’ve seen, Alabamians contribute to the funding of public services by paying taxes on their income, purchases, property and business operations. The next sections of this handbook will explain the basic principles of tax policy and examine the nuts and bolts of Alabama taxes.

Most people probably would agree that taxes should be “fair.” But what does tax fairness look like? From the vantage point of our own individual budgets, fairness may seem to be “lower taxes for me.” From the vantage point of the common good, however, economists have developed some basic tools for measuring tax fairness.

The charts on above illustrate three ways that any given tax can affect the total pool of taxpayers:

• A regressive tax requires people who make less money to pay a bigger share of their income than people who make more.
• A proportional tax (or flat tax) requires the same percentage of income from everyone, regardless of how much they earn.
• A progressive tax requires people who make more money to pay a bigger share of their income than those who make less.

Most people would consider a tax system to be unfair if those who earned less paid a higher percentage of their income in taxes than those who earned more. But that’s exactly how regressive taxes work. They reduce the standard of living of families with low and middle incomes, while affluent families are not similarly affected. The sales tax is a regressive tax, because people with low incomes spend most of their income on goods that are taxed. Property taxes also are often regressive, especially in areas where home values are increasing more rapidly than incomes for the lowest-paid workers. Alabama’s regressive tax system taxes families with low incomes deeper into poverty, while demanding less of wealthy people, who have enjoyed the vast majority of the state’s income growth in recent decades.

Proportional taxes also are inequitable in practice. Requiring families who are working hard to make ends meet to pay the same share of their income in taxes as a wealthy family results in vastly different consequences for each. For those who must spend most or all of their monthly income for basic necessities, even a relatively low tax rate can have a large impact on daily life. For wealthier taxpayers with more discretionary income, however, a tax at the same percentage will not have the same impact. Alabama’s income tax is close to proportional.

Progressive taxes are the fairest taxes. Families with low incomes can be exempted entirely by providing all taxpayers with an exemption large enough to cover the basic cost of living. Tax rates also can be graduated – meaning they rise along with income – so that families at middle and high incomes pay taxes fairly related to what they can afford. At both the state and federal levels, personal income taxes can be, and typically are, designed to be progressive taxes.

All state tax systems are different. But government leaders, economists and advocacy groups have identified several principles that mark a healthy tax system:

• Fairness – Does the tax system require people to contribute to the cost of public services on the basis of their ability to pay?
• Adequacy – Does the tax system raise enough money, in the short term and the long term, to finance needed public services? Does earmarking prevent revenues from being spent as needed?
• Simplicity – Does the tax system have confusing tax loopholes? Is it easy to understand how our state’s taxes work and to file a basic income tax return?
• Transparency – Is information about the tax system readily available to the public? Can taxpayers see that all businesses and individuals pay a fair share?

By these measures, what kind of health rating does Alabama’s tax system deserve? Read on to find out how our tax system compares to those of other states and how each tax affects the whole system. Spoiler alert: We have a lot of work to do.

How does Alabama’s tax system measure up?

Alabama’s tax structure is among the nation’s most unfair, according to the 2024 edition of ITEP’s Who Pays? report, an analysis of the tax systems in all 50 states. (See whopays.org for the full report.) ITEP’s calculation includes both state and local taxes and excludes households where the primary tax filer or their spouse is aged 65 or older, because older adults often benefit from tax provisions unavailable to most other people. If you compare Alabama’s chart above with other states’ charts in Who Pays?, two things stand out:

• We rely heavily on regressive sales taxes. Alabama has high state and local sales tax rates. We continue to tax groceries (though at a lower rate than other consumer goods), which account for a large share of spending for households with low incomes. And we tax relatively few services, which people with higher incomes tend to buy more often.
• Our income tax is only moderately progressive compared to other states. Alabama’s income tax is almost flat for all but the lowest-paid 20% of families, so it doesn’t offset our steeply regressive sales tax. We’re better off on this measure than states without an income tax, like Florida and Tennessee, but not by much. And our income tax is even less fair than flat taxes used in some states, largely because of some generous tax breaks for the highest earners.

The result for Alabama is an upside-down tax system in which the less you make, the more you pay. The lowest-paid fifth of Alabamians pay nearly 12% of their incomes in state and local taxes, while the wealthiest 1% pay just 5.4%. Adding to the upside-down nature of this structure, Alabama is the only state to allow a full federal income tax (FIT) deduction on state individual income taxes. This tax break’s benefits flow disproportionately to wealthy households.

Alabama has an upside-down tax system in which the less you make, the more you pay.

All four legs of our state tax system need repair. Alabama made its income tax slightly less regressive in 2006 and 2022, but it remains mostly flat. While Alabama took historic steps to reduce the state grocery tax in 2023 and 2025, our sales taxes still remain high, taxing low-paid workers deeper into poverty. Our property taxes have changed little since the end of segregation and provide large tax breaks to wealthy owners of timber and agricultural land. And our corporate income taxes have numerous loopholes that allow many of the wealthiest corporations operating in Alabama to pay nothing.

Sections 4-7 look at each of these taxes – how they work, how they measure up and how we could improve them.

The Alabama Tax and Budget Handbook