The Alabama Policy Institute (API) is backing a bill by House Minority Leader Anthony Daniels (D-Huntsville) to remove the state tax on overtime pay.
House Bill 217 (HB217) would eliminate the current tax levied on overtime pay for Alabama workers by excluding overtime from the state definition of "gross pay."
HB217 has bipartisan support, with notable Republican cosponsors like House Speaker Nathaniel Ledbetter (R-Rainsville) and State Rep. Arnold Mooney (R-Indian Springs).
"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," API said in a statement. "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."
Alabama currently adheres to the federal Fair Labor Standards Act (FLSA) guidelines. The FLSA requires Alabama employers to pay employees a $7.25 minimum hourly wage, which becomes $290 for a 40-hour work week. Anything over 40 hours a week is commonly called "overtime."
FLSA guidelines also dictate employees must receive at least time-and-a-half pay for overtime. Current state law counts all overtime pay as "gross pay" and, therefore, is susceptible to taxation.
HB217 would exclude all overtime from being counted as "gross pay" in the state. However, since the IRS still includes overtime pay as taxable income, overtime pay would still be federally taxed.
Alabama's state tax rates go from 2% at the lowest bracket to 5% at the highest, which most citizens fall under.
"There are currently nine states that do not levy a state income tax," The API statement continued. "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 field."
It continued, "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."
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