Overtime tax exemption bill will have much larger fiscal impact than expected

Maybe $150 million more.

When approved by lawmakers in 2023, allowing people to have their overtime earnings tax-free for 18 months was expected to reduce income tax revenue to the Education Trust Fund by “an estimated minimum of $34 million for fiscal years 2024 and 2025.”

The legislation also required more reporting by Alabama employers on their overtime pay to the Alabama Department of Revenue.

A recent report from ADOR said in 2023 “the total amount of overtime wages paid, if exempted, would have potentially provided an average of $56 in tax savings per employee with a total amount of $184 million in tax savings.”

In 2023, 116,830 employers paid 3.28 million employees overtime totaling $5.4 billion in overtime wages, according to ADOR. But not all of that is eligible for exemption under the 2023 law.

Kirk Fulford, the deputy director of the Fiscal Division of the Legislative Services Agency, on Tuesday told Alabama Daily News the office did not have the full data now being reported by businesses when drafting that fiscal note of a minimum of $34 million.

The impact of the tax cut will be mitigated in part because it took effect three months into the 2024 fiscal year, Fulford said. Also, the information being reported is still an estimate and can’t reflect the actual impact on individual taxpayers, Fulford said.

“All that said, because of where we are with the difference between revenues — even flat revenues — and expenditures we can absorb the reduction without impacting current budgets,” Fulford said.

The overtime bill was sponsored by Rep. Anthony Daniels, D-Huntsville, and rapidly gained bipartisan support. About the original fiscal note, Daniels said it didn't reflect Alabamians spending their overtime money and putting it back into the economy.

This fiscal news comes as Alabama lawmakers consider multiple tax cuts and credits this legislative session.

“This is problematic to now have an estimate that is off by almost $150 million,” said Sen. Arthur Orr, R-Decatur, chairman of the Senate education budget committee. “It will significantly and negatively affect education revenues and members should be mindful of this as they are asked to vote on a slew of tax credit, exemption and reduction legislation that is pending in the Legislature for passage during the last days of the session.”

Orr tried to amend the overtime bill in 2023 to cap its impact at $25 million. Gov. Kay Ivey removed that cap in an executive amendment. She also reduced the time before the tax cut is sunset, from the end of 2026 to mid-2025.

In the month of January, according to a monthly ADOR report, 71,270 employers reported paying 539,674 employees $280 million in overtime in January. On average, employees kept $11 that month. That’s $5.9 million that didn’t go to the ETF.

Officials have been warned though that January will likely be a low month for the tax savings. That’s because the average overtime exempt wages per employee was only slightly over $500, meaning that amount of savings was calculated based on the 2% tax bracket. Tax savings for subsequent reports will start at 4%. Depending on someone’s filing status, 2% is taxed on the first $500 earned and 4% after that.