Businesses across Alabama are experiencing labor shortages. Meanwhile, the state’s labor participation rate, 56.8% as of December, ranks near the bottom in the U.S. There simply aren’t enough workers currently willing or available to fill statewide job openings, and this labor shortage is a threat to Alabama’s economy.

One Alabama lawmaker is proposing an innovative solution to incentivize Alabamians to get to work: untaxing overtime wages. The plan would not only benefit workers, it would also help business owners plagued by staffing shortages since before the pandemic.

When you think of a proposal to lower taxes, your first instinct may be to assume that such a bill would be spearheaded by the Republican supermajority in the Alabama Legislature. But in this case, you would be wrong. Huntsville Democrat Anthony Daniels, the Alabama House Minority Leader, is leading the charge to remove state income taxes from overtime payments. The question is, why aren’t Republicans putting forth more proposals to lessen the tax burden and provide work incentives?

Daniels recently laid out his plan in a guest opinion column submitted to several statewide media outlets.

A longtime proponent of eliminating the sales tax on groceries, Daniels discussed the financial squeeze Alabamians are feeling due to almost record-high gas and grocery prices, as well as the state taxes assessed on these essential items.

“[T]his is why so many Alabama workers choose to work overtime when they have the opportunity, so that they can offset the rising cost of living,” Daniels wrote. “Wouldn’t it help workers and their families put more money in their pockets if we eliminated the state tax on overtime pay? Simply, YES.”

Daniels estimates that a full-time employee making $15 an hour who works 10 hours of overtime would see his bi-weekly paycheck rise by around $111. Over the course of a month, more than $200 extra towards essential household needs is not inconsequential.

Daniels also feels that the plan would benefit businesses because more employees would be willing to put in additional hours to fill in labor shortages. 

We often hear about the state’s near record-low unemployment rate, currently around 2.8%. Having an unemployment rate significantly lower than the U.S. as a whole is a good thing. But we hear less about the very real labor shortages that Alabama businesses have faced for several years.

Alabama has a “most severe” labor shortage, the U.S. Chamber of Commerce explains. Chamber data shows that the state has just 50 available workers for every 100 job openings. Only seven states and the District of Columbia have lower ratios of the number of workers available compared to the number of open jobs. This is hitting most sectors of the economy.

As it currently stands, Alabama follows the federal Fair Labor Standards Act in regards to overtime pay. That means that hourly employees working more than 40 hours per week receive at least one-and-a-half times their regular pay rate. While their overall state tax rate remains the same, the more money an employee makes the more taxes they pay.

Is repealing the tax on overtime pay the best way to provide tax relief to citizens? No, because it is ultimately limited in scope. Given the state’s record budget surplus, lawmakers should favor broader reforms providing tax relief to all Alabamians over more targeted tax relief.

But that’s not to say that Daniels’ proposal is without merit. Taken as part of a wide-ranging relief package, it could be one piece of the puzzle incentivizing citizens to work, filling Alabama’s labor shortage, and boosting the state’s labor participation rate. Alabama currently has far too many disincentives to work, whether it’s burdensome occupational licensing requirements, the current state income tax structure, or the potential expansion of Medicaid.

When more Alabamians are actively engaged in the workforce the entire state benefits. Daniels should be commended for his willingness to lower taxes and propose legislation providing economic relief to hard-working Alabamians. I hope that Daniels’ Republican colleagues will follow his lead.

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].