Sales taxes: The key driver of Alabama’s upside-down tax system
Should wealthy people pay at a lower tax rate than everyone else? Most Alabamians would answer with a resounding “no.” Yet that’s exactly the result that our state’s tax system produces. Families with low incomes in Alabama pay more than twice the share of income in state and local taxes that the top 1% do.
By far the biggest cause is our state’s overreliance on sales taxes. They apply to a wide range of consumer goods, including necessities like food and clothing. And the tax on a $20 item is the same whether you make $20,000 or $20 million. (See below for more on Alabama’s grocery tax.) As a result, the sales tax takes the biggest bite out of the budgets of families with low incomes, who must spend most of what they make on items subject to sales tax just to get by.
Families with low incomes in Alabama pay more than twice the share of income in state and local taxes that the top 1% do.
How do Alabama’s sales taxes work?
The Legislature established the current state sales tax in 1939 at 2% on retail sales of tangible personal property like clothing, appliances, toys, food and over-the-counter drugs. The sales tax is defined by statute rather than the constitution. That means the Legislature can increase or decrease it without a vote of the people. Twenty years after introducing the tax, lawmakers increased it to 3% and expanded it to include entertainment. In 1963, legislators raised the sales tax to 4%. Lawmakers voted unanimously in 2023 to reduce the state sales tax on groceries to 3%. In 2025, lawmakers approved a second state grocery tax reduction, to 2%.
The state also levies some special sales taxes (in the form of excise taxes, privilege taxes and use taxes) on certain products, including gasoline. Special sales taxes on products that some people consider to be vices, such as tobacco and alcohol, often are called “sin taxes.” Over the years, the Legislature has found it easier to justify increasing this kind of tax than the general sales tax. By contrast, Alabama always has taxed cars at a lower rate (2%).
In 2015, Alabama adopted the simplified sellers use tax (SSUT) to collect sales tax on items purchased over the internet. Online sellers (such as Amazon and eBay) voluntarily collect the SSUT of 8%. Unlike the state sales tax on items purchased in a brick-and-mortar store, the SSUT is divided by formula between the state, counties and municipalities. As of early 2023, state and local governments had received $365 million in SSUT revenues.
Most Alabamians also pay municipal (or city) and county sales taxes to support services ranging from schools to parks to police. Local governments set the rate for these taxes but must follow state law in specifying what to tax. Combined municipal, county and state sales taxes range from 7% in the Kansas community (in Walker County) to 11.5% in Tuskegee and Shorter (in Macon County). The Legislature has granted municipal governments the authority to increase sales taxes without a vote or even a hearing. (Counties can act on their own to increase sales taxes used for schools, but not for other purposes.) In 2025, the Alabama Legislature also gave counties and municipalities the authority to decrease their local sales tax on groceries.
In theory, the sales tax applies to all retail transactions – that is, purchases by the final consumer. In Alabama, this means purchases of goods and entertainment, but not other services that account for an increasing share of consumer spending. Like almost all states, Alabama exempts some “essentials” like rent and prescription drugs. In 2023, the Legislature reduced the state sales tax on food to 3%, followed by another reduction to 2% in 2025. But Alabama still applies the full sales tax to many other essentials like shoes, clothing and over-the-counter medicines.
Racial inequity at a glance
The Alabama Constitution limits the ability of cities and counties to raise revenue needed to provide basic services for their residents. Services like fire protection, roads and streets, libraries, schools, parks, public safety and infrastructure like water and sewage service all require local funding. But Alabama has limited localities’ ability to make even the most basic decisions for themselves, including decisions on how to raise the revenue they need. While counties have some limited self-governance, local governments still cannot raise most taxes without permission from the Legislature. However, cities can set their own local sales tax rates without having to ask legislative permission, and counties can adjust local sales taxes for schools. These limitations force many cities and counties to rely on this regressive tax to provide basic services.
Like many other provisions of Alabama’s constitution, the denial of home rule to cities and counties has a racialized history. The Constitution of 1875, passed immediately after Reconstruction, placed most of the power in the state in the hands of the Planters and Big Mules who ran the state government. These restrictions remained in both the 1901 constitution and the 2022 recompilation. This restricted the ability of Black-majority communities to make decisions for themselves. In recent years, the “preemption” of local authority has denied Birmingham the right to increase its minimum wage, restricted the ability of localities to remove Confederate monuments and denied Montgomery the ability to apply an occupational tax on people who work in the city but live in predominantly white suburbs.
Taxing survival: Alabama is 1 of 9 states still taxing groceries
It’s an exclusive list, but Alabama shouldn’t be proud to be on it. Alabama is one of only nine states still collecting a state sales tax on groceries. Of the 45 states with a general sales tax, 36 exempt groceries entirely, and eight others (including Alabama as of 2023) either charge a reduced tax rate or offer a tax credit to help families with low incomes offset grocery tax payments.
By taxing groceries, Alabama adds to the cost of a basic necessity of life. That hurts the economy by leaving shoppers with less money to buy meat, vegetables and other products. It hurts working families by making it harder for them to get ahead. And it hurts Alabama by fueling an upside-down tax system that requires people with low and middle incomes to shoulder too much of the cost of education, health care and other public services that benefit all of us.
How do Alabama’s sales taxes measure up?
We pay sales taxes in small bits throughout the year, unlike once-a-year property and income tax payments. This fact can mask the sales tax’s severe impact on Alabamians who are working hard to make ends meet. In fact, the sales tax is the most regressive of the three major taxes (income, property and sales), because it consumes a much greater portion of the household budget for families with low and middle incomes than for wealthy people.
Alabama’s state sales tax rate (4%) is lower than that of most states. However, when you add in local sales taxes, the combined sales tax rate (averaging 9%) is among the nation’s highest. Sales and excise taxes in Alabama provided 45% of all state and local revenue in 2023, the 12th highest share nationwide, according to the Institute on Taxation and Economic Policy.
Our sales tax continues to apply almost entirely to goods and entertainment, even as spending patterns shift more toward services. Families with low incomes pay a sales tax on laundry detergent, while wealthier families can get their clothes dry-cleaned tax-free. Luxury services like landscaping, house cleaning or interior design are not taxed either.
Alabama is one of a shrinking minority of states still taxing groceries. While the state grocery tax reductions that went into effect in 2023 and 2025 were a vital step forward on tax justice, Alabama is still one of only nine states with any state tax on groceries. Shoppers who buy $100 worth of food in Pensacola pay $100. But in Montgomery, that same food costs $108.
Alabama is still one of only nine states with any state tax on groceries. Shoppers who buy $100 worth of food in Pensacola pay $100. But in Montgomery, that same food costs $108.
Fortunately, sales taxes don’t apply to food bought with food assistance under the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps. But SNAP benefits cover only a portion of grocery purchases for most families who receive them. Families with low incomes must pay for the rest of their food out of pocket. Alabama continues to tax those groceries, albeit at a reduced rate.
How could we improve our sales taxes?
As the most regressive of the major taxes, the sales tax works best when balanced by a progressive income tax. That’s a problem in Alabama, because our nearly flat income tax does not come close to offsetting the regressive sales tax. The best way to reduce the sales tax’s impact on families with low and middle incomes would be to collect a larger share of the funding for public services from the income tax and local property taxes.
Alabama can modernize its sales tax system to make the tax less regressive and better reflect current spending patterns. Policy changes that would advance these goals include:
- Modernize sales taxes on goods and services. Reduce or eliminate sales taxes on essential goods to avoid taxing people with low incomes into poverty. Policymakers should find a way to eliminate the sales tax on groceries while ensuring adequate funding for public education. Alabama also can generate additional revenue by broadening its tax base to include services primarily purchased by households (not businesses) and “digital goods” like video and music streaming services.
- Expand the sales tax base to include more services. Broaden the sales tax base to include a wider range of personal and professional services, which would help the state preserve revenue lost by decreasing the tax on food and other necessities. The state should identify and assess services that can be included in the tax base without disproportionately increasing sales taxes on individuals with low incomes.
- Adopt a progressive approach to taxing services. Implement a progressive approach to taxing services, considering the ability to pay and potential impact on households with low incomes. Graduated tax rates on luxury services used by the wealthiest households could help maintain fairness and reduce the sales tax’s regressive nature.
The best way to reduce the sales tax’s impact on families with low and middle incomes would be to collect a larger share of the funding for public services from the income tax and local property taxes.
- Target exemptions for essential services. While expanding the tax base, provide exemptions for essential services that directly impact families’ well-being. Exempting services like health care, education and basic utilities could help ease potential negative impacts on Alabamians with low incomes. Lawmakers also could offset existing sales taxes or future sales tax increases with refundable income tax credits that gradually phase out as income increases.
- Regularly review and adjust sales tax rates. Establish a mechanism for regular review and adjustment of the sales tax system to accommodate changing consumption patterns and economic trends. This flexibility would help ensure Alabama’s tax system remains effective and responsive over time.
- Conduct a cross-state comparison. Analyze sales tax structures in other states that already have expanded their tax base to include services. Policymakers can learn from those states’ experiences and tailor policy recommendations to suit Alabama’s economic and social environments.