What taxes do businesses pay in Alabama?

How does Alabama tax businesses?

Business taxes provide the important “fourth leg of the stool” of our tax system. Alabama’s business taxes were restructured in 1999 after courts ruled the old system unconstitutional because it taxed out-of-state companies at a higher rate.

Today’s structure relies on two taxes:

First, the corporate income tax is a 6.5% tax on the taxable profits of corporations doing business in Alabama. Like all states, Alabama is barred by federal law from taxing all of the income of multistate companies. Each state uses apportionment rules – based on the share of business activities that take place in the state – to divide these companies’ profits into in-state and out-of-state portions. A 2021 change in Alabama’s apportionment rule moved some manufacturing profits into the out-of-state portion, further reducing corporate income taxes owed to Alabama.

In place of the income tax, insurance companies pay taxes on premiums. Utility companies pay both income taxes and taxes on gross receipts.

Second, the business privilege tax is a tax on the company’s net worth. In Alabama, this tax is capped at $15,000 a year. (That’s a problem. See “How do Alabama’s business taxes measure up?” below to learn why.)

Businesses pay other state and local taxes as well:

Nearly a quarter of the tax dollars that businesses pay are for state and local sales taxes on items purchased for their own use or consumption. The sales tax does not apply to “inputs to production” or goods offered for resale. For example, Alabama taxes the pizza sold by a restaurant, but the restaurant does not pay state tax on the flour or other raw ingredients. Businesses pay an excise tax on motor fuels for business use.
Businesses pay at least twice the rate of property tax that homeowners pay. Business property is taxed on 20% of appraised value, and utility property is taxed on 30%.
Businesses contribute to employees’ payroll taxes for unemployment insurance, workers’ compensation and disability insurance.

A 2021 change in Alabama’s apportionment rule moved some manufacturing profits into the out-of-state portion, further reducing corporate income taxes owed to Alabama.

This graph reveals some striking ways in which Alabama’s business taxes differ from national patterns:

Alabama is sharply below average in its reliance on the property tax for business tax revenues.
The state is sharply above average in use of business excise (e.g., motor fuel) taxes.
Unemployment insurance taxes account for a lower share of business taxes in Alabama than the national average.
Alabama businesses pay more in sales taxes than the national average, reflecting the state’s high overall sales tax rate.
Licenses and fees account for a higher percentage of business taxes in Alabama than the national average, adding to strain on small businesses.

Racial inequity at a glance

Alabama offers significant subsidies and tax breaks to companies operating, expanding or locating in economically disadvantaged areas of the state called “enterprise zones.” Enterprise zones originally were classified as geographic areas (like Alabama’s Black Belt) suffering from high unemployment, low educational attainment levels, population decline or other signs of economic distress. In 2019, however, Alabama expanded its definition of “enterprise zone” to include any Alabama county with a population of less than 50,000. As a result, 45 of Alabama’s 67 counties have become eligible for tax incentives and exemptions originally targeted to the most economically disadvantaged areas of the state.

Despite the expansion of eligibility for these subsidies, Alabama remains one of the poorest states in the nation, as economic development has remained close to stagnant in many parts of the state. In 2023, Good Jobs First (GJF) assessed the relationship nationwide between race, ethnicity and corporate subsidies. The group’s findings indicated that states that provide economic development subsidies in the way that Alabama does often exacerbate racialized inequality. These kinds of subsidies often disproportionately transfer public wealth to white male executives and the companies they run, according to GJF.

How do Alabama’s business taxes measure up?

Alabama’s corporate income tax collections declined as a share of revenue between 2005 and 2015 but have since increased to account for 11.2% of tax revenues for the ETF. State and federal corporate tax laws and loopholes have been the major driver of changes in corporate income tax collections. Federal corporate tax law affects Alabama’s tax collections because the two often are linked by state law.

Yet Alabama provides many special business tax breaks of its own. For example, Alabama is the only state to let corporations deduct all of their federal income taxes from state taxable income. (Missouri allows a partial deduction.) This lowers the effective tax rate (the tax as a share of profits) dramatically. On the surface, Alabama’s 6.5% corporate income tax rate is higher than the rate in neighboring states. But the effective rate (including the federal income tax deduction) may be significantly lower.

Recent legislation has proposed eliminating the federal income tax deduction while reducing the corporate income tax rate, making Alabama a more competitive location for new businesses. Other legislation passed in recent years allowed corporations to exclude federal COVID-19 relief funds as income when calculating their state taxes.

Alabama is one of a declining number of states (16 now, down from 25 in 2015) that levy a business privilege tax. But Alabama caps the tax, unlike most other states with a business privilege tax. Companies above the cap pay taxes on a lower share of their net worth – an advantage of being big. Because it’s based on net worth instead of profits, the privilege tax is less sensitive to economic changes than the income tax – and less susceptible to tax avoidance techniques. A bill to eliminate Alabama’s business privilege tax nearly passed the Legislature in 2022.

On the surface, Alabama’s 6.5% corporate income tax rate is higher than the rate in neighboring states. But the effective rate (including the federal income tax deduction) may be significantly lower.

Many multistate corporations are able to avoid state income taxes due to how they are allowed to treat income earned, or spent, in other states or nations. In 28 states and the District of Columbia, state laws requiring combined reporting of out-of-state income and expenses address this problem. By requiring this information on a state income tax return, states can ensure that corporate income is appropriately reported and required taxes are paid on that income. Despite legislative efforts, Alabama still does not require combined reporting, allowing creative accounting to reduce income taxes owed here. Alabama would see an overall revenue gain of $371 million a year if we adopted domestic and worldwide combined reporting, according to a 2025 estimate from the Institute on Taxation and Economic Policy.

Businesses also benefit from economic incentives, usually in the form of tax breaks, intended to encourage location or expansion in Alabama. Recent changes in state law have increased the employment and wage standards that companies must meet in exchange for incentives – and have improved the state’s ability to hold companies accountable for failing to meet commitments. Still, much work remains to ensure full transparency in reporting the costs and benefits. Legislation passed in 2023 improved transparency somewhat, but it remains difficult to track which corporation received incentives or how those incentives benefited workers or the state. Alabama lost almost $179 million from incentives in 2023, Good Jobs First estimated based on state and federal tax reports, with our largest cities and counties losing an additional $231 million in tax revenue that year.

How could we improve our business taxes?

Businesses benefit from vital public infrastructure like education and roads just as individuals and families do. Numerous changes to Alabama’s business taxes could make them fairer and ensure businesses pay an equitable share of the cost to maintain and enhance the common good:

Remove the deduction for federal income tax payments and drop the corporate income tax rate to 6%. The current 6.5% rate really amounts to 4.2% when factoring in the deduction for federal income tax payments.
Raise the cap on the business privilege tax so the largest and most profitable corporations will compete more fairly with smaller ones. Even with this change, Alabama’s business tax levels would remain below those of most other states.
Adopt combined tax reporting for businesses and their subsidiaries. By treating a company and all of its related enterprises as one taxpayer, Alabama could keep a business from deducting payments to its own subsidiary from its state taxes. This change also could prevent corporations from shifting taxable in-state earnings to other states to avoid Alabama taxes. Alabama should embrace the approach taken by 28 states and the District of Columbia to require accurate reporting of out-of-state income and expenses.
Restore Alabama’s three-factor apportionment formula for calculating corporate income tax liability. Until 2021, Alabama’s formula accounted for companies’ shares of payroll, property and sales located in the state. But the current formula, known as “single sales factor,” is based solely on sales. Many states that have adopted a single sales factor formula have seen significant decreases in corporate income tax revenue.
Decouple Alabama’s business taxes from the federal tax code so that tax breaks or increases given by Congress do not automatically apply to state business taxes. This would allow the Legislature to decide for itself if a particular tax break is good for Alabama.
Limit tax incentives for luring companies to Alabama. Many companies rank tax breaks low among the reasons they choose to locate in a state, but they still bargain for the best incentive plan they can get. Numerous studies show the most effective incentives are a skilled workforce, a good education system and other quality-of-life measures. Large corporations should pay their fair share to support those investments.