API fighting to protect overtime tax cut for those ‘trying to work a little harder' in Alabama

The Alabama Policy Institute (API) is urging state lawmakers to safeguard the tax cut they passed for employees working more than 40 hours per week.

API unveiled its 2025 BluePrint for Alabama, a comprehensive 30-point agenda designed to promote free markets, limited government, and strong families in the state in the upcoming 2025 state legislative session. One of the items in the roadmap is extending the elimination of taxes for overtime work.

Stephanie Smith, the group’s CEO, discussed the issue Thursday on WVNN’s “The Yaffee Program.”

“[T]he idea is, when people are trying to provide for their family working extra time, why would we tax them? Why would the state tax them for that work at a higher rate? And so yeah, that overtime tax elimination was accomplished in 2023 and it has a 2025 sunset, which means that it goes away, meaning that the tax comes back in 2025 unless the legislature act,” Smith said. “And so we’re advocating that the legislature actually makes that permanent, because we believe in the concept of work and the fact that there is dignity in work, and we don’t think that the state should be charging people extra for trying to work a little harder.”

House Bill 217 was passed in the 2023 legislative session, which removed the state income tax obligation for a full-time, hourly wage employee for work performed over 40 hours a week. The tax break will expire on June 30, 2025 if lawmakers don’t extend it.

“[P]eople who are working that type of job and doing and creating overtime, they’re putting that money back into the economy,” Smith explained. “They’re maybe putting it in a 401K, or maybe they’re putting money away, but for the most part that demographic is putting that money back into the economy at a restaurant or at a hardware store or at the local Walmart. And so that money is actually going back into the economy to be cycled again, instead of not being available because they’re not working.”

There has been some concern about making the tax cut permanent because it has already caused a larger shortfall in revenue going to the state’s Education Trust Fund (ETF) than was originally projected.

“The synopsis from the powers that be in Montgomery were that it would cost about $35 million well, it ended up costing about $230 million so there was an element of surprise there,” she said. “And so I think that some of the budget folks were surprised by that. And it created a situation where they were like, ‘Whoa, let’s put on the brakes here.’”

Smith doesn’t believe the shortfall is a reason to take more money from taxpayers in Alabama.

“But our take on that is that’s $230 million into the back into the economy, and it’s also a tax cut,” she argued. “And when you sunset a tax cut, that’s rating taxes.”

Yaffee is a contributing writer to Yellowhammer News and hosts “The Yaffee Program” weekdays 9-11 a.m. on WVNN. You can follow him on X @Yaffee