MONTGOMERY — Both the State House and Senate passed on Thursday amended legislation that excludes all overtime pay by hourly public and private workers in Alabama from state income taxes.

House Bill 217 (HB217) by House Minority Leader Anthony Daniels (D-Huntsville) would eliminate state income taxes on all overtime pay for Alabama hourly workers by excluding overtime, or any hours worked above 40 hours per week, from the state definition of "gross pay."

The exemption is available for tax years 2024, 2025, and 2026. The bill passed the House unanimously on May 2. 

The bill was amended on Wednesday in a Senate committee to exclude only the first $2,000 of wages earned from weekly hours worked above 40 hours from state income taxes. 

However, that amendment was tabled on the Senate floor on Thursday. Instead, the legislation was amended to cap the program at $25 million overall with no per-worker tax-free overtime wage cap. A previous estimate of how much the uncapped program would cost the state was $45 million.

State Sen. Sam Givhan (R-Huntsville) said on the Senate floor on Thursday, "This is an opportunity we've got to really make a difference." 

"This has been a great bipartisan opportunity we've worked together on," Givhan said. "I appreciate (House Minority) Leader (Anthony) Daniels' vision in coming up with this. This is, I think, innovative and I was glad to quickly call and reach out to him to ask if I could be the Senate sponsor for this bill."

Givhan said, "We're at a time in our economy where we need a lot of people participating in the labor force and to try to motivate that extra work that people are doing and rewarding them for that."

"That's going to get us started. I don't pretend that this is where it needs to stop, but we do need to get into this slowly," he added.

The amendment requires the Department of Revenue to "adopt rules to ensure that no more than $25 million, annually, in aggregate income taxes otherwise due from all taxpayers is exempt from income tax."

"I do see it being a little bit of an administrative headache, but I think this is fairer to the employees again because otherwise we'd be sort of stifling when some employees only need it for a smidgen of their cap, and then another employee really put in the overtime and then didn't see much benefit," Givhan said. 

State Sen. Rodger Smitherman (D-Birmingham) said, "This is probably the best step that we can make in the immediate future to make sure that our productivity in whatever business it is will continue on." 

"This is one of the things that we do that meets the rubber where it meets the road," Smitherman continued. "These are the hourly working people for minimum wage or whatever it is, and these are the people who need to be incentivized to keep going. These are the people who need the opportunity to do this the most." 

Education Budget Chair State Sen. Arthur Orr said how the income tax exemption on overtime pay would be implemented by the state was "to be determined."

"I'm a little bit confused on how it will work with the Department of Revenue and their doing this. I think this bill will probably grow and become permanent in our state and we'll have to account for that on the education budget," Orr said. "I appreciate the representative kind of meeting me halfway. He got more of the half, but that's okay. It'll help Alabamians and not others that we tend to do a lot."

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