The tax cut on Alabamians’ overtime wages that went into effect in January and officials thought would cost the state about $34 million this year is actually worth an estimated $230.7 million through September, according to a recent report by the Alabama Department of Revenue.
The data, obtained by Alabama Daily News, is based on employers’ wage information reported to ADOR.
The tax cut, championed first by Democrats and then Republicans in the 2023 legislative session, sunsets in June of 2025 and lawmakers and Gov. Kay Ivey will have to decide in the upcoming legislative session if it, or some amended version of it, continues.
Legislative and state fiscal officials have previously said the early estimates of the tax break’s cost were wrong because the state didn’t have access to information on how much employers paid in overtime. Estimates in the spring put the impact at about $184 million.
The bill eliminating income tax on overtime was sponsored by Rep. Anthony Daniels, D-Huntsville. Daniels could not be reached on Friday but has said he wants to see the exemption continued and that impact data doesn’t reflect the impact of Alabamians spending their higher overtime earnings and putting that money back into the economy.
In the Senate in 2023, education budget committee chairman Sen. Arthur Orr amended the legislation to cap its impact at $25 million per year and sunset it at the end of 2026. Ivey removed that cap in an executive amendment. She also reduced the time before the tax cut is sunset, ending it June 30, 2025.
A comment from Ivey’s office about the larger than expected impact of the cut and her recommendations for its future was not available Friday.
Orr on Friday told ADN the cut’s impact on the Education Trust Fund, which funds education at all levels, is “staggering.”
“While I thought the original idea was very good to help Alabama workers, I believed there were too many unknowns as to the fiscal impact,” Orr told ADN on Friday. “As a consequence, in the Senate we capped the fiscal impact with a ‘go slow’ or incremental approach as the fiscal cost to education became known.”
At the current rate, Orr estimates the cut will mean by July 2025 “$345 million lost for the funding of children’s education across the state.”
Two months into fiscal 2025, revenues to the ETF are down more than 5%. The largest decrease is in income tax revenues. Meanwhile, lawmakers will soon have to consider significant funding increases, including about $134 million more in 2026 for the teachers’ health insurance program.
“Most members of the Legislature have not been through an economic down cycle yet and had to fund ongoing operations during difficult economic times,” Orr, a lawmaker since 2006, said. “We need to be very careful going forward about the revenue decisions we make.”
Rep. Jamie Kiel, R-Russellville, is on the House education budget committee.
“This is why we have sunsets,” Kiel said about the $230 million impact. “It gives us an opportunity to revisit and relook at (exemptions) and make sure we don’t put our Education Trust Fund in peril.
“My guess is, as budget projections come in, we’ll look at that and all the other sunsetting tax credits and see how they fit in the overall budget picture. And we have to balance that with increases (including the health insurance costs).”
Senate Minority Leader Bobby Singleton, D-Greensboro, said he expects to be supportive of efforts by Daniels and other House members to renew the tax exemption, but there could be modifications.
“Looking at those numbers, I think there may have to be some sort of cap,” Singleton said on Friday. “There may have to be some sort of middle ground because I don’t think anyone expected it to be that high.
“But at the end of the day, it is still a great concept giving Alabamians and families a break and the ability to keep more of their paycheck in this time of inflation.”