overtime tax exemption in 2023

The Alabama Legislature Thursday gave final approval to a bill that would exempt overtime pay from income taxes, subject to a $25 million cap.

HB 217, sponsored by House Minority Leader Anthony Daniels, D-Huntsville, passed the Senate 34-0 Thursday afternoon. The House concurred in changes to the bill, which goes to Gov. Kay Ivey.

Daniels said in a phone interview Thursday afternoon that the bill, which had bipartisan support, would help “the worker, the hourly worker” and adjust their pay by about 5%, the top state income tax rate.

“They’ll take home more money through the 5% increase,” he said. “They’ll be able to bring more money home. You basically cut taxes by 5% on overtime.”

The legislation would exempt money earned after 40 hours of work each week from gross income calculations.

Senators this week debated a cap on the deduction. As passed by the House, the legislation would have cost the Education Trust Fund $45 million a year when fully implemented. State income taxes all go to the education budget.

Senate Finance and Taxation Education Committee Chair Arthur Orr, R-Decatur, introduced an amendment Wednesday that would have limited the deduction to the first $2,000 of overtime pay. The change would have reduced the cost to the ETF to about $21.6 million a year, according to the Legislative Fiscal Office.

But Sen. Sam Givhan, R-Huntsville, introduced a new amendment to the bill on Thursday that would remove the individual cap on individual overtime and replace it with a $25 million cap in the Education Trust Fund. A worker could claim all their overtime on the bill, but the state would only pay out claims up to the $25 million cap.

“I don’t pretend that this is where it needs to stop,” Givhan said. “But we do need to get into this slowly.”

Senators seemed to agree with the amendment, but some questioned how it could be implemented, especially if eligible workers claim money after the cap has been reached.

“When it runs out, how do we deal with that?” asked Senate Minority Leader Bobby Singleton, D-Greensboro. “And how does (the Department of) Revenue deal with that?”

Orr said he was “a little bit confused” on how the cap would work. Givhan said Thursday the amendment came from Daniels, and that he wasn’t certain how it would work.

“I take it it’s going to be first-come, first-served, which is unfortunate because maybe the hardest worker there waits to file his or her taxes,” he said. “And you know, administratively it is a concern.”

Daniels said the $2,000 cap would return little to the worker, and that the $25 million cap would allow those who qualify to claim all their overtime. Daniels also said it was not clear where workers would be most likely to work overtime.

“I don’t see us meeting the cap right now,” he said. “But if we get even close to the cap, it creates a justification for me to increase the amount.”