Millions of Americans would benefit from Trump's plan to eliminate taxes on overtime pay, but it will be a challenging task.

• At a September rally in Arizona, President-elect Trump declared that he would abolish taxes on any overtime hours worked beyond 40 per week.
• A change in policy on taxing earnings could affect millions of American workers, including both lower-wage and higher-earning workers who frequently work overtime.
• The Budget Lab at Yale estimates that 8% of hourly workers and 4% of salaried workers in the U.S. would be eligible for the proposed tax credit, but this may not be a significant enough portion of the labor market to outweigh other competing tax priorities.

Tax relief may provide a little more hope for the millions of Americans who work overtime.

This week, Republicans secured a narrow majority in the House with 218 seats, leaving a few races still undecided. As a result, they achieved a Republican trifecta, increasing their chances of passing President-elect Trump's campaign proposals, including one that would eliminate taxes on overtime.

The overtime tax proposal may not be the top priority of the new administration when it comes to tax cuts, and some Democrats have criticized it as "fake," but it is likely to be part of broader discussions on tax reform.

President Trump was re-elected by a significant margin, allowing him to fulfill the campaign promises he made, as stated by Karoline Leavitt, a spokesperson for the Trump-Vance transition team in an email.

Workers should be aware of the overtime proposal and its potential impact on their finances.

A bill already introduced in Congress, and some state action

Trump announced his tax-free overtime proposal on the campaign trail in September, stating that as part of his additional tax cuts, all taxes on overtime would be eliminated. At a rally in Tucson, Arizona, he explained that overtime hours would be tax-free for workers who work more than 40 hours a week.

In July, Congressman Russ Fulcher, a Republican from Idaho, introduced a bill in Congress known as the Keep Every Extra Penny (KEEP) Act. The bill has been referred to the House Committee on Ways and Means, but it doesn't have much detail beyond stating that gross income should not include overtime compensation required under section 7 of the Fair Labor Standards Act of 1938. No further action has been taken on this bill since July.

Overtime pay has been exempted from state income tax in Alabama for tax years beginning after December 31, 2023, and ending prior to January 1, 2027. However, a similar effort in Wisconsin stalled earlier this year.

Hourly workers would receive most of the benefit

A change in policy on how overtime earnings are taxed could affect millions of American workers, potentially saving higher earners hundreds to thousands of dollars.

Joseph Rosenberg, senior fellow at The Urban-Brookings Tax Policy Center, stated that the policy could reach a broad audience but would also be expensive in terms of decreasing federal government revenue.

In 2023, 60% of household employment and about two-thirds of wage and salary employment were FLSA-overtime eligible workers, according to a report from The Budget Lab at Yale, citing DOL data. Out of these, 82.1 million were hourly workers and 15.6 million were salaried workers. However, being eligible under FLSA doesn't necessarily mean working overtime regularly. According to John Ricco, associate director of policy analysis at The Budget Lab, 7 million Americans regularly worked overtime last year, with 6.4 million being hourly workers and 600,000 being salaried. This translates to about 8% of hourly workers and about 4% of salaried employees who work FLSA-qualified overtime on a regular basis. On the other hand, about 7% of hourly workers and 70% of salaried workers do not qualify for FLSA.

The tax benefit for some workers may not significantly affect the majority of the U.S. workforce, as the population is over 300 million and the workforce is over 168 million people. According to Alex Muresianu, senior policy analyst at the Tax Foundation, the impact on the workforce will depend on how Congress defines overtime pay.

Cost to government could reach $3 trillion over decade

The estimated cost of the new tax law for the federal government ranges from $225 billion to $3 trillion over a decade, depending on how Congress implements it, according to Muresianu.

Would the payroll tax exemption be limited to income tax or would it also apply to payroll tax?

The substantial federal deficit could hinder the passage of any of Trump's proposed tax plans beyond extending the 2017 cuts. If Republicans' proposal to extend the Trump tax cuts for the next 10 years is implemented, it would increase the deficit by $4.6 trillion, according to the Congressional Budget Office. The total cost of all the new tax cuts proposed could reach approximately $10 trillion over a decade, according to various estimates.

New tariffs on imports could generate up to $3 trillion in new government revenue, making it possible for Republicans to be more willing to act on costly initiatives.

The Department of Government Efficiency aims to reduce bureaucracy, regulations, and wasteful spending, as announced by Trump earlier this week, with Elon Musk and Vivek Ramaswamy leading the office.

""Reducing spending could potentially cover the cost of the tax proposals, but it's not a straightforward solution since not collecting income tax poses a problem in a deficit situation," Mohs stated."

Despite efforts to control federal spending across various administrations, the national debt has persisted. On Capitol Hill, every dollar allocated is met with resistance from recipients in every district during appropriations battles. While tax cuts may still be passed, efforts to offset lost revenue with spending cuts face a difficult challenge. Ultimately, deficit concerns may not prevent tax cuts, but may limit the number of tax priorities that the administration and Congress can pursue.

"According to Rohit Kumar, co-leader of PwC's national tax office and a former deputy chief-of-staff to Senate Majority Leader Mitch McConnell, the history of long-term deficit concerns clashing with near-term policy has resulted in near-term wins, with a success rate of 1.000."

'Not going to be top of their list'

The new administration and Congress may prioritize extending the provisions of the 2017 Tax Cuts and Jobs Act, which will expire in 2025, while also considering the growing deficit when discussing complex tax proposals such as tax-free overtime.

Steve Mnuchin, former Trump Treasury Secretary, stated that tax cuts are a crucial element of his program and should be easily passed in Congress.

Even with a GOP majority on Capitol Hill, there is uncertainty about whether all tax cuts can proceed.

The PwC analysis predicts that the tax battle ahead may face challenges due to the narrow margins of the House and Senate Republican majorities, even if the budget reconciliation process is used, as it was in 2017 for the TCJA.

"According to Rosenberg, the fiscal cost of introducing the new measure into an already challenging and complex endeavor may make it difficult to lift, especially if Congress wants to act quickly and early in 2025. He believes that this may not be a top priority for Congress."

During the campaign, Trump proposed many plans to benefit taxpayers, but Mohs cautioned, "It's unclear how they will select which proposals to implement."

Tax cut package could be pushed into late 2025

Trump's campaign proposal acknowledges the economic concerns of voters and seeks to go beyond maintaining the status quo in terms of financial relief, which may increase its visibility after the administration's initial goals for the extended TCJA are achieved, according to Rosenberg.

The upcoming expiration of a temporary suspension of the federal debt limit on January 1, 2025, may lead to a debate over extending the debt limit and avoiding a default on federal debt obligations. This, combined with the deteriorating U.S. fiscal policy outlook, may impact the discussion on 2025 tax legislation. PwC advised its clients that reaching an agreement on addressing expiring TCJA tax provisions and campaign tax and trade proposals could delay action on a reconciliation tax bill until late 2025.

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