Many of Alabama’s elected officials profess opposition to socialism in campaign ads. Opponents of socialism presumably embrace capitalism. But Alabama’s business tax climate suggests otherwise.

The Tax Foundation’s State Business Climate Index, authored by Janelle Cammenga and Jared Walczak, is distinctive among business climate indexes by focusing entirely on taxes. Other `indexes include things like the quality of the labor force, crime or business costs beyond the control of state policy.  Alabama ranked 39th in 2022 and between 39 and 41 annually since 2014.

The index uses five categories of taxes with weights based on importance in business decisions and variation in state policies. The components and weights are individual income (31%), sales and excise (24%), corporate income (21%), property and estate (14%) and unemployment insurance (10%).

One might expect such an index to focus on corporate taxes. But many businesses, and especially startups, are not corporations and pay the individual income tax. Businesses pay sales and property taxes, which are costs. Businesses in high tax states face a disadvantage relative to competitors in low tax states. Excise taxes on cigarettes and alcohol hurt retailers by promoting smuggling and cross-border shopping.

The index uses over 120 specific items to measure rates, the tax base and the distortions created. When taxes distort business decisions, they produce an extra cost. Raising the same revenue with highly distortive taxes hurts a state economy.

The components are technical and boring; I will spare you the details. But the complexity creates an issue. Many small businesses fail by not correctly paying taxes. Having to hire tax accountants and lawyers increases tax compliance costs.

Alabama’s ranks on the components show where we might improve. We rank best on corporate taxes, at 17th, followed by unemployment (18th), property (19th), individual income (27th) and sales (50th). The sales tax rank will surprise no one familiar with Alabama’s taxes. Our property tax rank is surprising because Alabama has the lowest property taxes. But businesses are not exempt from these taxes, and this component also includes estate taxes.

The climate ranking is based on tax statutes. Alabama aggressively courts businesses with tax breaks. The Tax Foundation, in a different report, found that Alabama places a low tax burden on new businesses due to the targeted exemptions. This report excludes tax breaks because “if a state needs to offer such packages, it’s most likely covering for an undesirable business tax climate.”

Let’s consider now a fundamental question: Why tax businesses at all?

Perhaps to lower the burden on average folks by taxing rich businesspeople.  Okay, but a business consists of many persons: the entrepreneur or owner(s), managers, employees, and suppliers. Plus, the customers.

Economists compare the outcomes in a market with and without a tax to determine who really pays taxes, called the incidence. “Businesses” do not pay taxes. The business may send payments to the government, but one of the above-mentioned groups pays the tax; which group depends on the tax and market conditions. Economists are unsure of the incidence of some taxes. Workers or customers and not owners might pay business taxes. Transparency enables citizens to control the government. Citizens need to know how much they pay in taxes to determine if the government offers good value. Taxes of uncertain incidence reduce transparency.

Here's another argument against taxing business: if we tax something, we get less of it. Businesses make the goods and services that make modern life prosperous. Many progressives think that checks from the government create prosperity; I hope Alabamians know better. But if business is the source of prosperity, shouldn’t we want a better business tax climate?

States enact their own taxes. We could change every item tracked by the Tax Foundation. If our elected officials truly oppose socialism, they should dramatically improve Alabama’s business tax climate.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University. The views and opinions expressed here are those of the author and do not necessarily reflect the policy or position of 1819 News. To comment, please send an email with your name and contact information to