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Either way can be used, though some unsaid rules do apply. It is usually left uncapitalized when referring commonly to it, such as "My sister is on a trip to the state of Alabama. It is usually capitalized in governmental and law-related documents, such as "The legislature of the State of Alabama hereby decrees that the Yellowhammer is its state bird." So in reality, it depends on the context.

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Q: In the phrase State of Alabama is state capitalized?
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