API’s 2025 BluePrint for Alabama puts forward several proposals aimed at easing the tax burden for residents. The Alabama Policy Institute (API) suggests introducing a flat individual income tax rate of 3.95%, eliminating the 2% bracket, and reducing the corporate income tax rate to 4.75%. These measures, along with additional proposals, could save taxpayers $1.278 billion annually in income taxes and $366.34 million in corporate taxes.
Additionally, API advocates for an immediate reduction to 2% in the state’s sales tax on groceries, which currently stands at 3%. The think tank estimates this change would lead to savings of $121.9 million per year. API also supports the permanent extension of the state’s overtime tax exemption, which has already provided $232 million in relief during its first nine months. Extending this exemption permanently could save working Alabamians $300 million yearly, according to API.
API’s combined proposals aim to reduce taxes by $2.066 billion annually without cutting spending or altering projected transfers to reserve funds. A potential $95 million annual saving could also be realized by eliminating the state’s business privilege tax.
The Democratic Party’s tax reduction plan aligns closely with API’s recommendations, though with some important differences. The Democrats propose a reduction in the top individual income tax rate to 4%, a permanent overtime exemption, and an immediate reduction in the sales tax on groceries to 2%, projecting a total tax reduction of $1.7 billion each year. To offset these reductions, they suggest a comprehensive gambling package and the repeal of the CHOOSE Act. However, API opposes these offsets, citing potential negative impacts.
The Alabama House Republicans are pushing a series of tax bills, including a reduction of the grocery sales tax to 2% and adjustments to dependent exemptions and standard deductions. They also seek to double the retirement income tax exemption, proposing cumulative tax cuts of $191.8 million. These maneuvers would potentially maintain a surplus of $1.468 billion in the Education Trust Fund (ETF) by the fiscal year 2026.
API President and CEO Stephanie Holden Smith emphasizes the need for legislative discussions on tax reductions to incorporate considerations of reducing NGO support and re-evaluating transfers to reserve funds. API calls for a more aggressive approach to relieve taxpayers in the state.
