By Mike Cason

Alabama Gov. Kay Ivey signs a bill to exempt overtime pay, defined as pay for more than 40 hours a week, from the state income tax at the Hyundai auto assembly plant in Montgomery. State lawmakers from both parties joined Ivey at the event, including the bill’s sponsor, House Minority Leader Anthony Daniels, D-Huntsville. (Mike Cason)

Starting January 1, full-time hourly workers in Alabama will pay no state income tax on overtime pay, defined as pay for work in excess of 40 hours in a week.

State officials gathered at the Hyundai auto assembly plant in Montgomery on Thursday to commemorate the new law, the result of a bill sponsored by Alabama House Minority Leader Anthony Daniels, D-Huntsville.

In effect, the law means a 5% raise on pay for work over 40 hours a week for full-time hourly employees, because that’s the rate of the state income tax.

Daniels originated the idea, which won support from the Republican majority and passed without a dissenting vote in June. It was sponsored in the Senate by Sen. Sam Givhan, R-Huntsville. Gov. Kay Ivey signed the bill in June and signed it ceremonially during Thursday’s news conference.

“We know that with the rate of inflation and the things that are going on with high costs, rising costs, and all of these items across the state of Alabama, Alabamians need to be able to take home more money,” Daniels said. “And this gives us that opportunity.”

State income tax revenues support the education budget. The fiscal note attached to the bill estimates it will reduce revenues by $45 million a year. But Daniels said that would be offset, at least in part, by people spending the extra money they take home. That spending will help fill tax coffers on local and state levels, Daniels said.

Daniels said the bill would benefit businesses by providing an incentive for more productivity.

Helen Duncan, president and CEO of the Business Council of Alabama, said the tax benefit should help employees dealing with a labor shortage that is widespread and is worse in Alabama than most states. Alabama’s labor participation rate of 57% is third lowest in the country.

“But it also rewards those employees that are working the long hours and getting the work done,” Duncan said.

The head of an organization that represents manufacturers and suppliers said the tax exemption should have a two-fold benefit to help address the labor shortage.

“Businesses are trying to do everything they can to continue to be productive when they know they need employees,” said Jon Barganier, president and CEO of Manufacture Alabama. “So, I think one thing this is going to do is encourage existing employees to work more hours if they can, if that works for their family.”

“But I also think that knowing that they can put more money in their pockets, new employees, especially in hourly wage jobs, will look to get back into the workforce,” Barganier said.

The law says the tax exemption will expire in June 2025. Lawmakers could remove the expiration and allow the exemption to continue. Daniels said he is confident lawmakers will extend the exemption because it will be so popular.

The law will require employers to report to the state the amount of overtime paid and the number of employees receiving overtime pay on a monthly or quarterly basis.

Daniels said State Revenue Commissioner Vernon Barnett has been traveling the state to help businesses prepare for the new responsibilities.

Barganier said Barnett and his staff participated in a webinar with about 100 companies about the new law. Barganier said it appears the Department of Revenue is making an effort to keep the reports from being burdensome.

“It sounds like to me they’re dovetailing off of forms that they are already filling out when it comes to payroll tax and things of that nature,” Barganier said. “Right now we’re hearing a positive response.”

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