Nearly two years ago, Alabama implemented a reform to exclude overtime income from the state’s individual income tax calculation. This exemption has been credited with increasing overtime work and alleviating labor shortages, saving taxpayers over $230 million in its first nine months and surpassing $300 million annually.
However, this legislation included a sunset provision set to expire on June 30, 2025. With the end of the 2025 Regular Session approaching, it is evident that the exemption will not be renewed.
Opponents argue that the exemption is too costly, citing an estimated annual reduction of $34 million in Education Trust Fund (ETF) revenues. However, actual savings have been closer to $320 million annually. The ETF’s total revenues in 2024 were over $10.65 billion, with local K-12 public schools receiving $5.31 billion.
During the 2025 Regular Session, several other tax cuts and spending increases were enacted. Total ETF spending is projected to rise by 6% under the fiscal year 2026 budget. New expenditures include additional funds for school funding formulas and salary increases.
The Legislature also approved legislation exempting diapers and baby supplies from sales taxes, set to sunset in 2030. In total, approximately $135 million in tax cuts have been enacted this session.
Alabama has seen significant revenue growth recently but has provided limited tax relief compared to states like Mississippi and Georgia. The overtime tax exemption was one such measure encouraging Alabamians to work longer hours.
###
