If passed, a bill before the North Carolina General Assembly would mean workers would be exempt from paying state income tax on overtime pay as well as bonuses of more than $2,500. 

This means more money in the pockets of workers. A worker earning $20 hour in regular wages, and $30 at time-and-a-half for overtime, would be exempt from paying that extra $10 to the state.

Proponents of the bill believe that not having to pay state income tax on the extra hours will encourage hourly wage-earners to seek out additional shifts and, thereby, reduce some challenges employers face in filling open positions.

State advocacy group Citizens for Tax Reform supports House Bill 490, introduced by state Rep. John Bell (R).

“It would reward workers for going that extra mile and extra effort for them and their families,” said Bill Graham, chairman of the group.

The majority of North Carolinians (55%) favor eliminating state income tax for overtime pay, according to a 2019 study; 57% of state residents surveyed said they would support eliminating state income tax on the first $2,500 earned.

Similar legislation is under consideration in Alabama. HB217, which passed the Alabama House last week, is headed to the Senate. If the bill becomes law, it would exempt overtime pay from state income taxes.

According to the bill’s sponsor, state Rep. Anthony Daniels (D), the legislation would boost workers’ take-home pay by 5% by eliminating state income tax requirements.

“This would decrease income tax receipts to the Education Trust Fund by an estimated minimum of $34 million for fiscal year 2024 and an estimated minimum of $45 million for fiscal years 2025 and 2026,” according to the bill’s text.

Supporters believe the loss will be offset by consumer spending.

“The bill shows that the legislative body is wanting to grow our economy at a pace that most of us have never seen before in our lifetime,” Speaker of the Alabama House Nathaniel Ledbetter (R) said.

The legislation includes a three-year expiration for the tax-exempt status, unless lawmakers choose to extend it.