State Sen. Andrew Jones (R-Centre) filed legislation on Tuesday to reduce local occupational taxes.

However, instead of eliminating them altogether, his bill would cap existing occupation taxes at 1%, prevent municipalities from creating new ones and carve out exemptions for certain workers.

Occupational taxes are local taxes individual workers and employees pay — via paycheck withholding — to operate within some municipalities in Alabama.

Twenty-five municipalities in Alabama levy such a tax, some at a rate as high as 2%. Birmingham and Auburn charge a 1% occupational tax on workers employed in the city.

The cities of Gadsden, Glencoe, Attalla, Rainbow City and Southside — all a part of Jones' district — levy a 2% occupational tax — the highest in the state, according to Alabama Daily News. Only 16 states have local occupational taxes, according to the Tax Foundation.

"One of the biggest problems with the occupational tax is that seven cities have taken them to the extreme with rates over 1%," Jones told 1819 News. "While I still think that occupational taxes are fundamentally unfair and regressive, I have heard the concerns of the mayors in Etowah County and sought to strike a balance between looking out for the taxpayers and protecting the cities. I think a 1% cap achieves that."

According to the legislation, occupational taxes in Alabama would be capped at a 1% rate. Municipalities with an occupational tax rate over 1% would be required to reduce their rate by 0.2% annually until the cap is met.

The bill also exempts "severance payments, supplemental unemployment payments, retirement incentive payments, or any similar payments paid by an employer to an employee" from the municipal occupational tax.

"This is an issue that happened when Goodyear closed in Gadsden," Jones said. "People got severance packages ... they were taxed at 2%."

The legislation also requires a county-wide referendum on the continuation of the tax in the 2028 primaries in Etowah County since it has two or more municipalities that levy an occupational tax above 1%. If a majority of voters are against continuation, the tax would be phased out by two-tenths of a percent annually until it is completely phased out.

Exemptions for first responders during a natural disaster or state of emergency, temporary workers and workers located on property annexed into a municipality with the occupational tax in 2023 or after are also in the legislation. The legislation also prohibits municipalities from increasing an existing occupational tax rate or creating a new occupational tax.

The bill would also "specify that the power of a municipality to license an exhibition, trade, business, vocation, occupation, or profession only applies to activity engaged in or carried on in the municipality," which would protect remote workers from the tax. The legislation also creates a refund process for workers who split their time within and outside of a municipality that collects an occupational tax.

The legislation has 14 co-sponsors in the Senate.

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