Alabama‘s tax system ranks 38th overall on the 2025 State Tax Competitiveness Index. Alabama’s graduated-rate income tax is very nearly flat since its top rate kicks in at only $3,000 in taxable income for single filers and $6,000 for married couples, without an inflation adjustment. The standard deduction, which is similarly unadjusted for inflation, has also eroded in value over time. Notably, Alabama is among the states that permit local income taxes, which Alabama terms the Occupational Tax.
On the corporate tax front, Alabama levies a 6.5 percent corporate income tax with 15 years of net operating loss (NOL) carryforwards, which is less generous than the federal allowance. A longer carryforward period would allow the state to tax long-run profits without penalizing cyclical businesses. Alabama does benefit, however, by conforming to the federal bonus depreciation allowance under Section 168(k).
Alabama has a low 4 percent state sales tax rate, but its combined state and average local rate is among the nation’s highest, at 9.29 percent. It is one of only three states, with Colorado and Louisiana, that allows local governments to administer their own local sales taxes, creating significant additional complexity and imposing high compliance costs for businesses, particularly out-of-state retailers. Alabama has created an alternative system for remote sellers, but it remains far inferior to the centralized collection and administration of local sales taxes found in 35 of the 38 states with such taxes.
Alabama has among the lowest effective property tax rates in the country on owner-occupied housing value, but it does impose a nonneutral split roll system, with commercial property treated less favorably than residential property. While the state does not have an estate or inheritance tax, it does impose a real estate transfer tax. The state also features a capital stock tax, which falls on business net worth without regard for profitability.
| Category | Rank | Rank Change | Score |
|---|---|---|---|
| Overall | 38 | -1 | 4.77 |
| Corporate Taxes | 14 | 2 | 5.51 |
| Individual Income Taxes | 34 | 1 | 4.89 |
| Sales Taxes | 49 | 0 | 3.17 |
| Property Taxes | 14 | -1 | 5.47 |
| Unemployment Insurance Taxes | 18 | 2 | 5.38 |
Get facts about taxes in your state and around the U.S.
Thirty-nine states will begin 2025 with notable tax changes, including nine states cutting individual income taxes. Recent years have seen a wave of significant tax reforms, and the changes scheduled for 2025 show that these efforts have not let up.
25 min read
Tax avoidance is a natural consequence of tax policy. Policymakers should consider the unintended consequences, both to public health and public coffers, of the excise taxes and regulatory regimes for cigarettes and other nicotine products.
5 min read
Many policies, such as minimum wage levels, tax brackets, and means-tested public benefit income thresholds, are denominated in nominal dollars, even though a dollar in one region may go much further than a dollar in another. Lawmakers should keep that reality in mind as they make changes to tax and economic policies.
6 min read