The Alabama Policy Institute (API) has expressed dissatisfaction with the recent decision by lawmakers in Montgomery not to extend the tax cut on overtime pay during the 2025 legislative session. Instead, lawmakers chose to reduce the state’s share of the grocery tax from 3% to 2%, effective September 1, 2025.
In a statement on their website, API highlighted that the overtime tax cut had saved Alabamians millions annually. “Nearly two years ago, the Alabama Legislature enacted a first in the nation reform to exclude overtime income from the calculation of the state’s individual income tax,” API stated.
They emphasized that in a state with a labor participation rate of 57.8% as of March 2025, this exemption was significant in increasing overtime work and alleviating labor shortages for business owners. The institute noted that within nine months of its introduction, taxpayers saved over $230 million due to this exemption, with annual savings exceeding $300 million.
Opponents of extending the tax cut argued it would cause a larger than anticipated shortfall in revenue for the Education Trust Fund (ETF). However, API countered that this shortfall would not have been substantial enough to justify ending the tax break.
“Nearly all income tax revenues are earmarked for the ETF budget,” continued API’s statement. They pointed out that in 2024, total ETF revenues exceeded $10.65 billion, meaning that $320 million from overtime tax cuts represented just 3% of all revenues.
API urged Alabama to follow other Republican-led states in offering broader tax relief measures. While states like Mississippi and Georgia have used revenue surpluses to implement notable income tax reductions, Alabama has limited its actions to targeted relief efforts.
