Alabama House Minority Leader Anthony Daniels and a bipartisan group of 23 co-sponsors, including Speaker of the House Nathaniel Ledbetter and Ways and Means Education Committee Chairman Danny Garrett, introduced House Bill 217, to exempt full-time hourly waged employees from paying taxes on work performed in excess of 40 hours per week. A similar bill, (SB 137), has been introduced by Senator Sam Givhan in the Alabama Senate.
Alabama adheres to the guidelines of the federal Fair Labor Standards Act (FLSA). Under the FLSA, Alabama employers must pay employees a minimum wage of $7.25 per hour ($290 per week). The FLSA requires that any employee who works more than 40 hours over a seven-day day period receive at least one and a half times their regular pay rate for those hours. In Alabama, that means a minimum of $10.87 per hour for overtime wages.
The state currently taxes overtime wages at the highest applicable tax bracket for an individual. For any employee making over $3,000 per year ($6,000 for joint filers) that rate is 5%. Most overtime wages fall into this bracket.
If this legislation passes, Alabamians will take home more of what they earn. Rep. Daniels estimates that an hourly employee making $15 who works five overtime hours per week would see their bi weekly rise by approximately $111. Over the course of a year that’s almost $2,900 in additional income; that is a permanent tax cut that workers could depend on.
Eliminating taxes on overtime pay could also prove benefits to employers. Alabama is currently experiencing a “most severe” labor shortage, having only 50 available employees for every 100 jobs openings. Alabama ranks 43 rd amongst states in terms of labor shortage severity.
Alabama’s labor participation rate is 56.7%. Labor participation represents the number of Alabamians who were employed or were actively seeking employment in the previous 30 days.
Statistics show that 43.3% of able-bodied working age Alabamians left the workforce and weren’t actively pursuing employment as of February 2023. Alabama ranks among the lowest in the nation for labor participation and has seen a steady decline from a peak participation rate of 65.1% in July of 1997.
Exempting overtime pay from taxes may not provide enough motivation to cause someone to reenter the workforce, but doing so could serve as an incentive for continued and enduring workforce participation. Though there is potential revenue loss, at least a portion of the additional income that a worker took home will go back into the economy; the state should see revenue increases in areas such as general sales and use tax receipts.
There are currently nine states that do not levy a state income tax. Florida, Tennessee, and Texas do not impose any income taxes. Alabama is at a disadvantage to these states in attracting new citizens and businesses. Eliminating the overtime tax is one way to begin leveling the playing
Alabama is one of the first states to make a serious effort to repeal the income tax on overtime pay. API supports this bipartisan initiative that seeks to reduce the tax burden on hardworking employees who are going the extra mile to work overtime to provide for their families.