House Minority Leader Rep. Anthony Daniels, D-Huntsville, says he wants to untax Alabamians’ income earned from overtime.
On Alabama Daily News’ podcast recently, Daniels said he’ll file legislation this session to remove the state income tax from hourly workers’ earnings over a 40-hour week.
“That would put more money in the pockets of those working class individuals who actually work, who do the overtime,” Daniels said. “It would be a 5% return for them.”
The state’s income tax rate is 5% on annual earnings of more than $3,000.
As lawmakers gear up to debate and decide how to best spend the astonishing $2.7 billion surplus in the 2022 education budget and make plans for the fiscal 2024 budget, several lawmakers, including Sen. Arthur Orr, R-Decatur, are proposing tax cuts and rebates.
Daniels said he doesn’t think a one-time rebate for many would have the same impact as tax cut for hourly workers. And he argues that the state would still get some of that money back when people spend their extra earnings.
Daniels uses the examples of a full-time worker making $15 an hour and getting a $960 paycheck, after taxes, every other week. If he worked 10 hours of overtime, that pay increases to $1,140 after taxes. But if the income tax were removed from the earnings from overtime, the worker would get $1,251.
“That’s more money going to the individual and that individual will spend those dollars, so (the state will) recoup that money either way,” Daniels argues.
Meanwhile, as prices remain higher than usual on many items, the state is earning more sales tax revenue off of them.
“Every time you buy something now, you’re generating more money for the state,” he said.
Daniels said he’s discussed the idea with multiple legislators on both sides of the aisle, including House education budget committee chairman Rep. Danny Garrett, R-Trussville.
“I think it’s a very interesting and intriguing idea,” Garrett said. “I think it merits a discussion.”
Garrett said he expects multiple proposals on targeted tax cuts, including some he and his Senate counterpart Arthur Orr, R-Decatur, have discussed.
Orr to file three income tax bills
Orr is considering filing multiple tax-cut bills, in addition to a tax rebate proposal he’s been discussing for several months.
Orr told Alabama Daily News he’s working on three tax deduction bills. They would:
- Increase the income tax exemption for taxable retirement income from $6,000 to $10,000;
- Eliminate the 2% income tax rate on the first $500 of taxable income;
- Reduce the 5% income tax rate gradually each year until it’s 4.95% in 2027.
“Those are three that I will be pushing out and I think we should consider,” Orr said.
Orr last week said he sees a path where the three tax deduction bills and a tax rebate to income tax payers are possible.
His proposed cuts would cost the state about a combined $50 million per year.
“I would see doing something like this,” Orr said. “One, it helps retirees, those on fixed incomes and over 65. Two, it helps those at the lower end and student workers by getting rid of that low-end tax rate — they’ll get the first $500 (tax free). And three, dropping the income tax rate I think helps us more competitively. For retirees and others looking to relocate, I think there’s something to be said for having a tax rate under 5%.”
Orr said his proposals could be good for Alabamians and wouldn’t have too significant an impact on the Education Trust Fund, to which income tax revenue flows. Orr also said he knows there will be other tax cut ideas in the upcoming session.
“One of those may be superior, but I at least want to put these three in the mix,” he said.