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Tax collections in the state of Alabama increased over the previous fiscal year, approaching a more standard pattern after the pandemic. Both the General Fund and the Education Trust Fund saw modest increases, according to a recent analysis from the Public Affairs Research Council of Alabama.
From fiscal year 2021 through fiscal year 2023, the two funds saw unusually high growth related to pandemic-related economic conditions and additional federal stimulus and relief payments.
In recent years, lawmakers have redirected certain growth-related taxes into the General Fund, contributing to more consistent revenue growth like the portion of the use tax shifted to the General Fund and the sales tax on online transactions. These two sources account for 25 percent of the General Fund.
In fiscal years 2023 and 2024, this trend was supported by an increase in revenue from interest on state deposits, driven by elevated interest rates applied to the state’s reserve of cash.
Alabama’s General Fund saw it’s biggest increase in interest revenue, but a steep rise in interest revenue is uncommon.
“During the pandemic, the U.S. Federal Reserve dropped the target effective federal funds rate, the rate financial institutions charge each other to borrow money, to near zero in order to lower the cost of borrowing and stimulate the economy. However, as inflation surged in 2022, the Federal Reserve raised interest rates to slow the economy and restrain surging prices,” the study reads.
“Inflation has cooled, and the Federal Reserve has begun to lower its target interest rates. Budget surpluses are decreasing, and most of the extra federal money in state accounts is being spent. As interest rates continue to decline, revenue from interest will retreat.”
Given the disciplined state spending during periods of growth, state budgets will remain stable as expenditures align more closely with revenue levels. The overall economy remains strong, which supports continued growth. As federal funding begins to decrease, the state will need to allocate more of its own resources to sustain and expand programs that have proven effective.
