Alabama House Minority Leader Anthony Daniels, D-Huntsville, will file legislation this year to make permanent the elimination of state income tax on hourly workers’ overtime earnings.
Widely supported by both sides of the aisle when Daniels brought the original legislation in 2023, the cut is costing the state’s education budget significantly more in lost individual income tax revenue than originally expected, about $230.7 million from Jan. 1, 2024 through September.
The tax cut will end in late June if lawmakers don’t extend it in the upcoming legislative session. In his pitch for permanency, Daniels argues it’s generating greater revenues for the state in other tax revenues, increasing companies’ productivity and letting Alabamians who need it keep more of their money.
The Legislature will soon debate the future of the tax cut amid flattening revenues to the Education Trust Fund as they prepare to craft the 2026 budget to fund K-12, community colleges and universities.
Daniels’ new legislation will also require a comprehensive economic study of the cut, looking at its direct and indirect impacts and revenues.
“The dynamic scoring of this bill has far more positive implications than the $230 million,” Daniels told Alabama Daily News recently. His math shows the state is gaining money under the cut and he’d like to see an independent study to verify that. He points to recent corporate income tax receipts and sales tax revenues, as well as hiring, in 2024, as proof.
In fiscal year 2024, which included nine months of the tax cut, corporate tax receipts were up 13.6% to $1.5 billion, a nearly $191 million increase over 2023.
So far in fiscal 2025, which started in October, corporate income tax receipts are up 4.6% or $17.4 million over the same time in 2023, prior to the cut going into effect.
“The overtime that people are working is helping companies become more profitable, because they’re getting their products out ahead of schedule and able to add more clients,” Daniels said.
Corporate income tax receipts have increased in recent years, from $582 million in 2019, according to state reports. That growth can also be attributed at least in part to the federal Tax Cuts and Jobs Act corporate rate cut and increased production and profits.
Minus the individual and corporate tax refunds in the first quarter of the year, total income tax revenue to the Education Trust Fund is -0.88% for the first three months of this fiscal year. Income tax revenue is the largest source of money for the ETF, sales tax revenue is second.
So far in fiscal 2025, sales tax revenue to the ETF is up 2% or $10.7 million to $542.1 million. The dynamic scoring Daniels wants could better determine how much of that increase is related to the tax cut.
Sen. Arthur Orr, R-Decatur, agreed this week that a study of the tax cut’s impact would be beneficial, but he also suggested looking at alternative potential cuts, including a reduction of the overall income tax or corporate income tax rates, that could help Alabamians and businesses.
Orr, chairman of the Senate education budget committee, said increasing the exemptions for retirees’ earnings from their 401Ks and other defined contribution plans could also be considered.
“If the Legislature wants to spend $230 million, $250 million via a tax cut, then let’s put everything on the table and evaluate them and make the best decision for the people of Alabama,” Orr said.
Meanwhile, Orr confirmed to ADN that another penny won’t come off the state’s sales tax on groceries later this year because the ETF’s revenue growth is below the 3.5% required in law to further the cut that took 1 cent off in fall 2023.
“That should also be on the table,” Orr said. “Maybe we should go back and revisit that and (remove another percentage from the sales tax). Does that spur the economy? Does that help more Alabamians?
“All these things need to be put on the table and discussed.”
Ryan Hollingsworth, executive director of the State Superintendents of Alabama, said anytime there is an appearance of a significant loss of revenue to the ETF, it’s concerning to education groups like his. He told ADN that any cuts should be replaced with new revenue.
“We’ve been spoiled in recent years with tremendous growth,” Hollingsworth said about the ETF. And there are expected new expenses in the 2026 education budget, including an additional cost for education employees’ health insurance.
“You have to plan for a slowdown, budgets are cyclical,” Hollingsworth said.
Meanwhile, state leaders are considering changing how public schools are funded, which, if approved, could also increase overall costs.
Many hourly workers “eat what they kill” and are likely to immediately put their overtime earnings back into the economy, Daniels argues.
As of November, wage and salary employment in Alabama increased by 37,300 to 2.2 million, a new record high, according to the Alabama Department of Labor.
The Alabama Department of Labor estimates there were about 1.1 million hourly workers in the state in 2023, the most recent year available. But it’s not clear how many of those were eligible or worked overtime.
Daniels said the number of individuals impacted by the cut won’t be known until people file their 2024 tax returns, but he estimates some are getting to keep $5,000 to $6,000 per year. For some, that amount of money can significantly change their financial situations.
Increasing the state’s low labor participation rate has been a goal of state leaders in recent years. Letting them keep more of their pay is an incentive to work, Daniels said.
Rosemary Elebash, state director of the National Federation of Independent Businesses, said she hasn’t heard anything from her members about the overtime law.
“But that might be a good thing, because usually I get complaints,” Elebash told Alabama Daily News.
She said many small businesses operate beyond Monday through Friday, 9 a.m. to 5 p.m. and pay overtime.
“We can’t hire enough people,” she said. “So the people we have, we’re asking them to step up and work those extra hours.”
Aside from revenue, the tax cut is a unique recruitment tool to lure more companies to Alabama, Daniels said. All other states tax overtime earnings.
“Who else has this incentive?” he said. “No one.
“… The pay raise for people is right here in the overtime.”
The legislative session starts Feb. 4.