Republican presidential nominee and former U.S. President Donald Trump speaks during a campaign event at the Cobb Energy Performing Arts Centre in Atlanta, Georgia, U.S. October 15, 2024.
Dustin Chambers | Reuters
The millions of Americans who work overtime have a little more reason to hope for tax relief.
Republicans this week eked out a slim majority in the House, winning 218 seats, with a few races still uncalled. This means a Republican trifecta and more chance of passing proposals floated by President-elect Trump on the campaign trail, including one that would scrap taxes on overtime.
Details on the proposal are scant and some Democrats have called the overtime tax promise “as fake as his tan.” It may not be the top priority of the new administration when it comes to tax cuts, or the easiest to pass, but the overtime proposal is likely to be part of broader discussions on tax reform.
“The American people re-elected President Trump by a resounding margin giving him a mandate to implement the promises he made on the campaign trail. He will deliver,” Karoline Leavitt, a spokesperson for the Trump-Vance transition team, wrote in an email.
Here’s what workers need to know about the overtime proposal and what it could mean for their pocketbooks:
A bill already introduced in Congress, and some state action
Trump unveiled his tax-free overtime proposal on the campaign trail in September but didn’t offer details. “As part of our additional tax cuts, we will end all taxes on overtime,” he said at a rally in Tucson, Arizona. “If you’re an overtime worker, when you’re past 40 hours a week, your overtime hours will be tax-free,” Trump said.
There’s already a bill in Congress that was introduced in July by Congressman Russ Fulcher, a Republican from Idaho. The Keep Every Extra Penny (KEEP) Act has been referred to the House Committee on Ways and Means and also doesn’t have a lot of details beyond saying: ”Gross income shall not include overtime compensation required under section 7 of the Fair Labor Standards 9 Act of 1938.” There hasn’t been any further action on this bill since July.
There have been mixed results at the state level to exempt overtime pay from income tax. Alabama passed a bill in 2023 that temporarily exempts overtime pay from state income tax. It’s in effect for tax years that begin after December 31, 2023, and end prior to January 1, 2027. A similar effort proposed in Wisconsin stalled earlier this year.
Hourly workers would receive most of the benefit
Millions of American workers currently work overtime and could be impacted by a change in policy on how these earnings are taxed. This could translate into savings of a few hundred dollars to several thousand dollars for higher earners who put in a lot of overtime, tax policy professionals said.
“It could be a fairly expansive policy in terms of who it could reach,” said Joseph Rosenberg, senior fellow at The Urban-Brookings Tax Policy Center. But it would also be very costly in terms of reducing revenue for the federal government, he added.
Department of Labor data show that there were 97.7 million employed workers last year who were eligible for FLSA-overtime protections. That represented 60% of household employment in 2023 and about two-thirds of wage and salary employment, according to a report from The Budget Lab at Yale, citing DOL data. Among these, 82.1 million were hourly workers and 15.6 million were salaried workers, the report said.
It’s important to note, however, that being eligible under FLSA doesn’t necessarily equate to actually working overtime. The Budget Lab noted that 7 million Americans regularly worked overtime last year; 6.4 million of these workers were hourly workers; while 600,00 were salaried. That translates to about 8% of hourly workers in the U.S. and about 4% of salaried employees who work FLSA-qualified overtime on a regular basis, according to John Ricco, associate director of policy analysis at The Budget Lab. Meanwhile, about 7% of hourly workers and 70% of salaried workers do not qualify for FLSA, the report said.
What’s more, on Friday, a U.S. District Court in Texas overturned a DoL rule that had expanded the salary cap for workers eligible for overtime pay starting in July, after a legal challenge brought by the U.S. Chamber of Commerce and supported by many industries. The court had already blocked the rule in Texas and Friday’s decision now vacates the DOL rule nationwide. Congress, though, is not bound by DoL rules in how it defines provisions in tax legislation, though a DOL rule could serve as a reference point.
While it could be a big tax benefit for some workers, it still wouldn’t impact the vast majority of U.S. workers, given that the U.S. population is more than 300 million and the workforce is more than 168 million people. “This is not likely to be a huge share of the workforce who would be impacted, depending on how tightly Congress defines overtime pay,” said Alex Muresianu, senior policy analyst at the Tax Foundation, a research think tank.
Cost to government could reach $3 trillion over decade
The Tax Foundation estimates it could cost the federal government between $225 billion to slightly over $3 trillion over 10 years, depending largely on how Congress designs the law, Muresianu said.
For example, would it be designed as just an income tax or would it be a payroll tax exemption as well? “A payroll tax exemption would reach lower down in the income distribution, but that has additional implications for the financing of Social Security and Medicare, as well as impacts on future benefits which are tied to the taxes that people pay on their income,” Rosenberg said.
The hefty federal deficit could be a stumbling block to passing any number of Trump’s various tax proposals beyond extending the 2017 cuts. Extending the Trump tax cuts for the next 10 years — as Republicans have proposed — would add $4.6 trillion to the deficit, according to the nonpartisan Congressional Budget Office. Including all of the new tax cuts proposed could bring the total price tag to roughly $10 trillion over a decade, according to multiple estimates.
It’s possible Republicans will be more willing to act on these costly initiatives, hoping to make up for some of the cost with revenue generated by new tariffs on imports, estimated at up to $3 trillion in new government revenue.
There could also be savings achieved by the new Department of Government Efficiency, said James Mohs, associate professor of accounting at the University of New Haven. Earlier this week, Trump announced that Tesla CEO Elon Musk and former GOP presidential candidate Vivek Ramaswamy will lead the office, which is charged with goals to “dismantle Government Bureaucracy, slash excess regulations, cut wasteful expenditures, and restructure Federal Agencies.”
“There’s more waste that can be trimmed than the cost of these proposals,” Mohs said. At least in theory, the government could find ways to pay for the tax proposals through reduced spending, but he added it’s not a slam dunk since “in a deficit situation, not having income taxed is a problem.”
Efforts to rein in the federal budget across multiple Democratic and Republican administrations in recent decades have come up short as the national debt has continued to grow. The reality on Capitol Hill is that every dollar spent is a dollar that every recipient in every district will put up a fight over in appropriations bills. That doesn’t mean tax cuts won’t get passed, but the effort to offset any lost tax revenue with spending cuts faces an uphill battle. In the end, deficit concerns may not derail tax cuts, but could limit how many tax priorities the administration and Congress can pursue.
“The arc of history here reminds us that every time long-term deficit concerns come into conflict with near-term policy, near-term wins,” Rohit Kumar, co-leader of PwC’s national tax office and a former deputy chief-of-staff to Senate Majority Leader Mitch McConnell recently told CNBC. “It’s batting about 1.000.”
‘Not going to be top of their list’
After the new administration and Congress take office, they are likely to focus heavily on extending provisions of the 2017 Tax Cuts and Jobs Act, which are set to expire at the end of 2025. There’s also the burgeoning deficit lawmakers need to consider when discussing one-off, more complicated proposals like tax-free overtime.
Former Trump Treasury Secretary Steve Mnuchin recently told CNBC tax cuts are “a signature part of his program. … I think that should be easy to pass in Congress.”
Others are less sure all the tax cuts can proceed, even with a GOP majority on Capitol Hill.
A PwC analysis of the tax battle ahead suggests that even using the budget reconciliation process which allows for a simple majority vote to pass a bill, as was the case in 2017 when the TCJA was enacted, narrow margins of the House and Senate Republican majorities could make it difficult to enact all of Trump’s campaign proposals.
“I think the fiscal cost of it is going to make it a pretty hard lift to introduce into what is already a pretty hard and complicated endeavor, especially if Congress wants to move quickly and early in 2025,” Rosenberg said. “I suspect this is not going to be top of their list.”
There are a lot of proposals that Trump floated during the campaign to benefit taxpayers, Mohs said, adding, “You don’t know how they are going to cherry-pick.”
Tax cut package could be pushed into late 2025
Trump’s campaign proposal does recognize the economic concern of voters and it represents the desire “to do a little bit more than just keeping status quo in terms of delivering financial relief,” so it may get more air time after the administration’s initial goals on extended TCJA are reached, Rosenberg said.
In terms of timing, there is the issue of reinstatement of a statutory federal debt limit on January 1, 2025, when a temporary suspension expires. A fight over extending the debt limit and averting a default on federal debt obligations, and the deteriorating U.S. fiscal policy outlook, may heighten debate on 2025 tax legislation, PwC advised its clients in a recent update after the GOP sweep of the House and Senate was official. Reaching an agreement on how to address expiring TCJA tax provisions and campaign tax and trade proposals could delay action on a reconciliation tax bill until late 2025, it said.
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