Corporate Income Tax
Alabama’s current 6.5% corporate income tax rate is amongst the highest in the Southeast. Because of Alabama company’s ability to deduct federal income taxes paid from state returns, the effective tax rate ends up being more competitive. However, having a high statutory tax rate puts Alabama at a disadvantage in attracting new business to the state.
According to a 2020 report from the Joint Legislative Task Force on the Tax Cuts and Jobs Act, “Alabama gets little to no credit for its lower effective tax rates resulting from the FIT deduction. We are advised that it is a meaningful competitive disadvantage in state comparisons by economic developers and companies looking to locate in the Southeast. Alabama will never know how often it has been “deselected” in a business location decision because it is perceived to have one of the highest corporate income tax rates in the Southeast.”
The Alabama Policy Institute’s 2023 platform calls for the Legislature to reduce corporate income tax rates to 4.75% and untie state tax payments from the federal tax code. Lowering the statutory rate would make Alabama more competitive with our neighbors and provide more stability to tax collections and rates moving forward.
Individual Income Tax
Alabama utilizes a graduated individual income tax structure with rates ranging from 2.0% to 5.0% The state begins collecting taxes on the first dollar of income that citizens make. All single filers making above $3,000, and married filers making about $6,000 pay the top rate of 5%.
Five Southeastern states currently have lower top income tax rates than Alabama. In addition to those states, Georgia, Mississippi, and Missouri have already enacted laws that will reduce those states’ top individual tax rates to lower than Alabama’s over the next few years. Tennessee and Florida do not collect any state individual income taxes.
Over the course of 2021 and 2022, 21 states cut income tax rates. In 2023 there are at least 12 states who are considering income tax cuts, while 8 of those states will be considering cuts for a second time. That includes Mississippi, who passed the largest income tax cut in state history last year. In 2023 Mississippi Governor Tate Reeves plans to pursue legislation that will eliminate all state individual income taxes.
Without enacting statutory rate changes, Alabama will have one of the highest income tax rates in the Southeast by the end of this decade.