State Sen. Andrew Jones (R-Centre) plans to reintroduce a bill to phase out local occupational taxes during the 2023 legislative session.

Eliminating occupational taxes are one way lawmakers can provide a small form of tax relief to citizens. Much like the proposal to repeal the state income tax on overtime pay, eliminating occupational taxes could incentivize Alabamians to work. It could also level the playing field for cities attempting to attract new businesses, because workers would take home a higher percentage of their paychecks.

This is not the first time Alabama lawmakers have attempted to rein in occupational taxes. In 2020 the legislature passed a law preventing cities from imposing new occupational taxes or increasing rates without legislative approval. Cities already collecting the tax were grandfathered in.

Jones introduced a bill last year that would phase out all city occupational taxes by decreasing them 0.1% annually over 20 years. The bill was met with heavy resistance from the Alabama League of Municipalities. Jones expects this year’s bill to be similar but indicates that he is open to compromise.

What is an occupational tax? Essentially it serves as a local income tax on an employee’s earnings. Alabama occupational tax rates range from 0.5% to 2%, and according to the Alabama League of Municipalities, 25 cities currently levy occupational taxes. Mountain Brook formerly levied the tax, but it was repealed in 2006.

Occupational taxes are levied on workers living outside of a city’s tax jurisdiction who come inside city limits to work. Proponents argue that these employees are benefiting from city services during work hours, so it is appropriate for them to contribute to the costs through the occupational tax assessment. Others believe this is an issue of state government trying to dictate local government’s ability to raise and allocate resources.

While these arguments are not completely without merit, there are other factors needing consideration.

Jones has witnessed firsthand the harmful effects of occupational taxes. “To me, the occupational tax is a disincentive for working, and it is something that also hurts economic development,” he said. “When people in my district look at economic development and job growth, one key reason we’ve been lacking in success is occupational taxes.”

Alabamians already face a variety of disincentives and barriers making it more difficult to attract workers and less profitable to enter the workforce. An additional income tax may be enough to keep some people from working, or they may seek employment in a city that does not collect an occupational tax. Jones believes that state and local government should be trying to encourage citizens to work instead of penalizing them for doing so.

This also puts businesses in tax-collecting cities at a disadvantage. “If two cities are competing to get a major employer, this could be a deal breaker in a lot of cases because that employer knows if they come to Etowah County, their employee is going to make 2% less than they would anywhere else,” Jones said.

Alabamians working remotely, a much more prevalent practice over the last three years, is another issue. It is likely that some who now work from home, rarely going to a physical office space, are still paying occupational taxes because of their employer’s address. In some cases, even temporary workers responding to an emergency in the state, such as a natural disaster, are levied an occupational tax.

Jones gave 1819 News an example of a worker in Birmingham, who was given an occupational tax rebate for days worked from home pre-pandemic. Birmingham stopped this practice shortly after the pandemic began, meaning that every eligible employee now pays the full tax regardless of where they work.

Just under 69,000 Alabamians worked from home in 2017, the U.S. Census Bureau’s American Community Survey reports. That total climbed to almost 209,000 by 2021, a 203% increase in less than five years. These are primarily private sector workers. The increase could be attributed to a temporary pandemic jump, but that does not appear to be the case. Experts predict that 36.2 million Americans will work from home by 2025, a 417% increase compared to before the pandemic.

While the pandemic was likely the impetus for more remote work, many jobs have remained that way. Why should Alabamians who work remotely and do not report to a physical office pay an occupational tax?

Jones should be applauded for his effort to lower the tax burden of hard-working Alabamians. It’s not wide-ranging tax relief, but it is a start. The legislature should prioritize ways to reduce taxes for all Alabamians, incentivize citizens to work, and give the state a competitive advantage in attracting new businesses and workers to Alabama during the 2023 legislative session.  

Justin Bogie serves as Fiscal and Budget Reporter for 1819 News. 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: [email protected].