Corporate Income Tax

Alabama’s current 6.5% corporate income tax rate is amongst the highest in the Southeast. Because of Alabama companies’ 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. This disadvantage persists despite relatively strong economic performance, as site selectors and businesses continue to rely heavily on statutory rates when comparing states.

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.” This dynamic continues to shape how Alabama is perceived in regional economic development competition.

Lowering the statutory corporate income tax rate would make Alabama more competitive with our neighbors and provide more stability to tax collections and rates moving forward. No major changes to Alabama’s corporate income tax rate were enacted during the 2026 legislative session, leaving the state’s competitive position largely unchanged.

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%. This structure results in relatively low thresholds for reaching the top marginal rate compared to other states.

Six Southeastern states currently have lower top income tax rates than Alabama. In addition to those states, the Georgia General Assembly has enacted laws that are reducing the state’s 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. As these changes take effect, Alabama’s relative tax competitiveness within the Southeast continues to decline.

Over the course of recent years, 21 states cut income tax rates. Additional states have continued to enact income tax cuts, with some doing so multiple times within a short period. That includes Mississippi, who passed the largest income tax cut in state history in 2022 and has continued to consider further tax cuts over the past several legislative sessions. This broader trend toward income tax reduction has continued through the mid-2020s, increasing competitive pressure on states like Alabama.

Without enacting statutory rate changes, Alabama will have one of the highest income tax rates in the Southeast by the end of this decade.