Alabama lawmakers approve amended proposal to exempt only a portion of overtime pay from income taxes

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Alabama lawmakers on Thursday approved legislation to exempt at least a portion of a worker's overtime pay from state income taxes.

The Alabama Senate voted 34-0 to approve a compromise version of the legislation to exempt overtime pay from the 5% state income tax. Senators concerned about the budget impact placed a $25 million aggregate cap on the annual amount of the tax cut. The House of Representatives voted 103-0 to accept the change. The bill now goes to Alabama Gov. Kay Ivey.

The exemption would end in three years unless extended by lawmakers.

ALABAMA SENATE COMMITTEE CUTS PROPOSAL THAT WOULD HAVE EXEMPTED ALL OVERTIME PAY FROM INCOME TAXES

House Minority Leader Anthony Daniels, the sponsor of the legislation, said the tax cut will help hourly workers and help industries recruit employees to work overtime shifts.

"They are able to bring more money home, so you've cut taxes basically by 5% on overtime," Daniels said.

The addition of the tax cap created questions about how it will be administered and what will happen if the $25 million is not enough to exempt all overtime worked in the state that year. The legislation directs the Alabama Department of Revenue to create rules for the implementation.

"I'm not sure how they are going to administer this. I take it is going to be a first-come, first-serve," Republican Sen. Sam Givhan, who handled the bill in the Senate, said. He said the other option would be to prorate the exemption where workers get a tax credit.

Daniels said he did not think it would be a problem because he is unsure if the cap will be exceeded.

Regardless, he argued it is a step forward for workers and hopes it will lead to a permanent tax exemption for overtime pay.