Trump plan to ‘end all taxes’ on overtime pay would benefit millions of Americans, but it’s going to be uphill battle

The millions of Americans who work overtime have a little multitudinous reason to hope for tax relief. 

Republicans this week eked out a slim majority in the House, winning 218 swear ins, with a few races still uncalled. This means a Republican trifecta and more chance of passing proposals platformed 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 must 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 suggestion is likely to be part of broader discussions on tax reform.

“The American people re-elected President Trump by a resounding margin dole out him a mandate to implement the promises he made on the campaign trail. He will deliver,” Karoline Leavitt, a spokesperson for the Trump-Vance evolution team, wrote in an email.

Here’s what workers need to know about the overtime proposal and what it could specify for their pocketbooks:

A bill already introduced in Congress, and some state action

Trump unveiled his tax-free overtime proposition 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 believed at a rally in Tucson, Arizona. “If you’re an overtime worker, when you’re past 40 hours a week, your overtime hours when one pleases 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 Observe Every Extra Penny (KEEP) Act has been referred to the House Committee on Ways and Means and also doesn’t should prefer to a lot of details beyond saying: ”Gross income shall not include overtime compensation required under cut up 7 of the Fair Labor Standards 9 Act of 1938.” There hasn’t been any further action on this bill since July.

There clothed been mixed results at the state level to exempt overtime pay from income tax. Alabama passed a bill in 2023 that briefly exempts overtime pay from state income tax. It’s in effect for tax years that begin after December 31, 2023, and end late to January 1, 2027. A similar effort proposed in Wisconsin stalled earlier this year.  

Hourly workers would inherit 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 tolled. 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 principles professionals said.

“It could be a fairly expansive policy in terms of who it could reach,” said Joseph Rosenberg, postpositive major fellow at The Urban-Brookings Tax Policy Center. But it would also be very costly in terms of reducing revenue for the federal control, he added.

Department of Labor data show that there were 97.7 million employed workers wear year who were eligible for FLSA-overtime protections. That represented 60% of household employment in 2023 and about two-thirds of wage and income employment, according to a report from The Budget Lab at Yale, citing DOL data. Among these, 82.1 million were hourly women and 15.6 million were salaried workers, the report said.

It’s important to note, however, that being fit under FLSA doesn’t necessarily equate to actually working overtime. The Budget Lab noted that 7 million Americans regularly applied overtime last year; 6.4 million of these workers were hourly workers; while 600,00 were salaried. That transfers to about 8% of hourly workers in the U.S. and about 4% of salaried employees who work FLSA-qualified overtime on a regular underpinning, according to John Ricco, associate director of policy analysis at The Budget Lab. Meanwhile, about 7% of hourly wage-earners 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 defeated a Department of Labor rule that had expanded the salary cap for workers eligible for overtime pay starting in July, after a juridical 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 finding now vacates the DOL rule nationwide, which would have cover as many as four million more workers. Congress is not resolved by DOL rules in how it defines provisions in tax legislation.

While it could be a big tax benefit for some workers, it still wouldn’t impact the incalculable majority of U.S. workers, given that the U.S. population is more than 300 million and the workforce is more than 168 million being. “This is not likely to be a huge share of the workforce who would be impacted, depending on how tightly Congress defines overtime pay,” pronounced Alex Muresianu, senior policy analyst at the Tax Foundation, a research think tank.

Cost to government could reach $3 trillion past decade

The Tax Foundation estimates it could cost the federal government between $225 billion to slightly over $3 trillion across 10 years, depending largely on how Congress designs the law, Muresianu said.

For example, would it be designed as just an gains tax or would it be a payroll tax exemption as well?  “A payroll tax exemption would reach lower down in the income order, but that has additional implications for the financing of Social Security and Medicare, as well as impacts on future benefits which are corresponded to the taxes that people pay on their income,” Rosenberg said.

The hefty federal deficit could be a stumbling hinder 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 father proposed — would add $4.6 trillion to the deficit, according to the nonpartisan Congressional Budget Office. Including all of the new tax cuts suggested could bring the total price tag to roughly $10 trillion over a decade, according to multiple estimates.

It’s plausible Republicans will be more willing to act on these costly initiatives, hoping to make up for some of the cost with take generated by new tariffs on imports, estimated at up to $3 trillion in new government revenue.

There could also be savings accomplished by the new Department of Government Efficiency, said James Mohs, associate professor of accounting at the University of New Haven. Earlier this week, Trump proclaimed that Tesla CEO Elon Musk and former GOP presidential candidate Vivek Ramaswamy will lead the office, which is cost with goals to “dismantle Government Bureaucracy, slash excess regulations, cut wasteful expenditures, and restructure Federal Interventions.”

“There’s more waste that can be trimmed than the cost of these proposals,” Mohs said. At least in theory, the sway 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 position, not having income taxed is a problem.” 

Efforts to rein in the federal budget across multiple Democratic and Republican furnishings in recent decades have come up short as the national debt has continued to grow. The reality on Capitol Hill is that every dollar worn out is a dollar that every recipient in every district will put up a fight over in appropriations bills. That doesn’t presage 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, default concerns may not derail tax cuts, but could limit how many tax priorities the administration and Congress can pursue.

“The arc of history here prompts us that every time long-term deficit concerns come into conflict with near-term policy, near-term prevail ins,” Rohit Kumar, co-leader of PwC’s national tax office and a former deputy chief-of-staff to Senate Majority Leader Mitch McConnell recently pull the plug oned 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 appropriate 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 shortage lawmakers need to consider when discussing one-off, more complicated proposals like tax-free overtime.

Past Trump Treasury Secretary Steve Mnuchin recently told CNBC tax cuts are “a signature part of his program. … I over that should be easy to pass in Congress.”

Others are less sure all the tax cuts can proceed, even with a GOP more than half on Capitol Hill.

A PwC analysis of the tax battle ahead suggests that even using the budget reconciliation process which deducts for a simple majority vote to pass a bill, as was the case in 2017 when the TCJA was enacted, narrow margins of the Blood and Senate Republican majorities could make it difficult to enact all of Trump’s campaign proposals.

“I think the fiscal expense of it is going to make it a pretty hard lift to introduce into what is already a pretty hard and complicated endeavor, singularly if Congress wants to move quickly and early in 2025,” Rosenberg said. “I suspect this is not going to be top of their index.”

There are a lot of proposals that Trump floated during the campaign to benefit taxpayers, Mohs said, adding, “You don’t have knowledge of how they are going to cherry-pick.”

Tax cut package could be pushed into late 2025

Trump’s campaign proposal does acknowledge the economic concern of voters and it represents the desire “to do a little bit more than just keeping status quo in terms of disburdening financial relief,” so it may get more air time after the administration’s initial goals on extended TCJA are reached, Rosenberg bid.

In terms of timing, there is the issue of reinstatement of a statutory federal debt limit on January 1, 2025, when a fleeting suspension expires. A fight over extending the debt limit and averting a default on federal debt obligations, and the eroding U.S. fiscal policy outlook, may heighten debate on 2025 tax legislation, PwC advised its clients in a recent update after the GOP destroy 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 shelve action on a reconciliation tax bill until late 2025, it said.   

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