House Minority Leader Anthony Daniels, D-Huntsville and fellow Democrats unveil legislative priorities at the Alabama Statehouse Tuesday Jan. 28, 2025. Democrats have introduced a bill to make an income tax exemption on overtime pay permanent. (Ralph Chapoco/Alabama Reflector)
Democrats in the Alabama House of Representatives have introduced a bill to preserve an income tax exemption on overtime pay that Republicans plan to jettison to pay for a tax cut package that includes a grocery tax reduction.
HB 467, sponsored by House Minority Leader Anthony Daniels, D-Huntsville, would remove a June expiration date from the tax break, approved in 2023, and create a commission to study its economic impact.
“These are hardworking Alabamians that are putting into our economy,” Daniels said at a press conference last week. “These are not handouts. These are dollars that they are earning.”
When approved, the tax break was estimated to cost the Education Trust Fund budget $34 million. But the Alabama Department of Revenue says that the exemption has reduced revenue to the ETF by about $230 million.
Republicans, who hold supermajorities in both chambers of the Legislature, have signaled since late last year that they planned to let the exemption lapse. Sen. Arthur Orr, R-Decatur, told media in December that the impact to the ETF could be almost $350 million before the exemption is set to expire.
House Republicans last week approved four bills that would cut taxes by $191 million.
The bills include legislation to increase the tax exemption for retirement income and increase the income tax thresholds, along with deductions and child tax credits for households who earn less than $120,000 annually.
Another bill would reduce the state grocery tax from 3% to 2% while also allowing but not requiring cities and counties to reduce their local grocery taxes.
Garrett told his colleagues in the House that reducing taxes on groceries is possible only if the tax break on overtime wages is discontinued.
All the tax breaks that legislators are considering reduce revenues to the ETF. Daniels said letting the overtime tax exemption expire would be a burden.
“We are increasing the taxes of hardworking Alabamians by about $230 million,” he said.
Daniels’ bill retains most of the language regarding the overtime tax exemption that is currently in state statute. The most significant change removes the section in the code that set time limits for the tax break, which was from October 2024 to June this year.
The legislation to exempt wages earned while working overtime was filed as the Republican budget chairs balked at how much the tax break has revenues directed toward the Educational Trust Fund budget.
More than a dozen other House Democrats have signed onto the bill as cosponsors, and Daniels said his proposal has received bipartisan support, including the Alabama Policy Institute, a conservative-leaning think tank that focuses on issues within the state.
The Economic Policy Institute, a left-leaning think tank based in Washington D.C.,, has publicly opposed Daniels’ proposal, arguing that it could benefit highly paid professionals and encourage employers to shift employees to hourly work without paying additional compensation.
According to a blog post, an employer could shift a person earning $50,000 and working 60 hours a week. The employer could offer $13.75 per hour to the same employee and have them work overtime. That would earn the worker an additional $4,000 after taxes without the employer having to pay the worker additional compensation.
“It creates a tax loophole that is ripe for abuse and, even if it could lead to some workers taking home higher after tax income when they work overtime, it does nothing to stop overwork of employees and it just lets employers off the hook when they are asking workers to work excessive hours,” said David Cooper, director of state policy and research at the EPI.
The exemption could also benefit highly paid hourly wage workers, white collar hourly employees such as attorneys or physicians. An example in the post considers a hypothetical CEO who earns a $4,000 hourly wage who then works more than the standard 40 hours, who would then earn even more because of the overtime tax exemption.
But the magnitude of that issue in Alabama is unclear.
“Unfortunately, the information is not reported to the Department by the income range of the person,” wrote Kirk Fulford, deputy director of the Legislative Services Agency Fiscal Division in an emailed statement. “We have no way of knowing that.”
Despite that, Daniels and other Democrats urge their colleagues to consider the overtime tax exemption to the list of proposals.
“It is giving hardworking Alabamians an opportunity to take more of their money home,” Daniels said. “But the dollars that this is returning, that is returning to our economy, is more than paying for itself.”
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Author: Ralph Chapoco