Alabama’s tax exemption on hourly workers’ overtime pay ends today and will have cost the state — and helped some workers save — more than $400 million during its 18-month existence.
According to an April report from the Alabama Department of Revenue, the latest information available, the income tax exemption that went into effect in January 2024 had an estimated cumulative value of $386.7 million.
In the month of April, 361,259 people were paid $287.1 million in overtime wages, according to the ADOR report.
The 2023 legislation creating the cut was widely supported by Republicans and Democrats. The law included a “sunset” provision, a common tool for experimental legislation that schedules a law to expire unless lawmakers act to extend it. The Legislature chose not to extend it in this year’s session, opting instead to focus on other tax cuts, the largest of which is a one percentage point reduction on the state’s sales tax on groceries. It goes into effect in September and will total about $122 million per year.
“We have chosen to expand the tax cuts for Alabamians, particularly through the sales tax deductions, rather than limit it just to those who are, one, working; two, have an hourly type job; and three, that hourly job allows them the possibility of overtime,” said Sen. Arthur Orr, R-Decatur. He’s chairman of the Senate education budget committee.
“That’s a small subset of Alabamians compared to the grocery tax that affects everyone,” Orr said.
Legislative and state fiscal officials have previously said the early estimates of the tax break’s cost, about $34 million per year, were wrong because the state didn’t have access to information on how much employers paid in overtime. Still, the total has surprised state leaders and some have wondered if businesses shifted more workers to hourly positions to take advantage of a pay boost under the law.
The state revenue and labor departments do not track the number of salaried versus hourly positions in the state.
Income and sales taxes are the largest revenue streams to the state’s Education Trust Fund which supports all levels of education in the state.
“(The tax cut) was done on a pilot basis because there was confusion about the cost — we didn’t know how much it would amount to,” Orr said.
House Minority Leader Anthony Daniels sponsored the 2023 tax cut legislation and filed an extension bill this year. It had bipartisan support, but never got a vote. Daniels argued his cut, letting people forego the 5% tax on their overtime, is more valuable to working-class families than another percentage point off of groceries.
He also argued that most of the state’s lost revenue from overtime taxes ends up in state coffers regardless, either through hourly workers spending their savings or through corporate tax receipts.
“It also increases productivity; increasing productivity increases profits, which increases taxes,” Daniels said.
The budget bill pending in Congress temporarily cuts the federal income tax on workers’ overtime earnings, as well as tips earned by those in the service industry. Assuming the federal bill passes, hourly workers would see greater tax decrease for overtime than the temporary state overtime tax reduction.
Orr said he believes the state leaders should focus on how to more broadly lower the state income tax for all payers. Decreases may be needed to remain competitive with neighboring states. Mississippi leaders this year approved legislation to phase out that state’s individual income tax.
Meanwhile, House education budget chairman Rep. Danny Garrett, R-Trussville, has previously said lawmakers want to eventually eliminate the remaining 2% sales tax on groceries.
“As the economy grows, everything is still on the table including matching the federal government’s cuts on overtime pay and tips,” Orr said.
This story was updated to clarify comments from Sen. Arthur Orr.