No tax on overtime is another gimmick that would do more harm than good

With Congressional Republicans having passed a budget resolution, one of the tax provisions certain to be discussed in federal budget deliberations will be President Trump’s expressed priority to exempt overtime pay from taxation. The idea has gained steam across the country, with lawmakers in 19 states already introducing bills in 2025 to exempt overtime pay from state taxes.

Like the misguided “no tax on tips” bills that have also been moving in some states, these “no tax on overtime” measures are a gimmick. Though pitched as support for regular working people, the primary beneficiaries of these proposals would be employers and high earners who game the system. Exempting overtime from taxation would do more harm than good, and there are far better ways to support workers putting in long hours.

In summary, exempting overtime from taxation would:

1. Encourage excessive hours of work while exacerbating inequities between workers able to work long hours and those who cannot.
2. Put downward pressure on base wages.
3. Open up a tax loophole easily gamed by high earners that would drain public budgets while further complicating the tax system.

No tax on overtime encourages excessive working hours and disregards widespread support for reducing work hours

Overtime exists to disincentivize employers from overworking their employees. If a boss asks workers to put in more than 40 hours in a week, they must pay a premium—usually 1.5 times their regular rate of pay—for those excess hours. (In some states, employers must pay overtime in other circumstances, such as when workers work more than eight hours in a day or work on a Sunday.) This policy decision to require extra pay for excess hours—established in the Fair Labor Standards Act (FLSA) of 1938—created the 40-hour work week. It was a policy choice made only after fierce struggle, organizing, and advocacy by workers who labored 60–80 hours a week in difficult and dangerous jobs.

The 40-hour work week has been the standard for most workers for nearly a century, but fundamentally, it is an arbitrary choice. In recent years, especially in the wake of the COVID-19 pandemic, public sentiment has shifted toward working less than 40 hours per week. According to a recent survey, 81% of full-time workers in the U.S. support a four-day work week.

Exempting overtime from taxes would encourage employees to work longer hours. For those workers wanting to work more than 40 hours a week, this tax benefit seems positive. But given that the vast majority of the public supports a shorter work week, it seems likely that workers desiring overtime do so because they like the extra money, not because they want to be working nights and weekends. Many would likely rather get a raise and not have to work extra hours, especially considering that working excessive hours is associated with a range of negative impacts on physical and mental health, well-being, and productivity.

Moreover, many workers are unable to work overtime—due to care responsibilities, health needs, or other constraints—even if they want to. These workers shouldn’t be disadvantaged in the tax code.

“No tax on overtime” benefits employers and sets up new avenues for worker exploitation

There are clear benefits to employers from exempting overtime from taxes. By giving workers who receive overtime an after-tax pay boost—at no expense to employers—there would be less pressure on employers to reduce overwork or raise workers’ wages.

No tax on overtime would particularly benefit employers currently misclassifying staff as exempt from overtime. The FLSA exempts a variety of occupations from overtime, but the largest exemption is for “executive, professional, and administrative” workers (sometimes called the “white collar” exemption.) This was intended to exempt higher-paid workers who have sufficient bargaining power in their roles to exercise judgment over when and how much to work. To qualify for this exemption, employees must have certain job duties and be paid above a certain threshold of weekly pay, currently just $684 a week (the equivalent of $35,658 annually.) Both the Biden and Obama administrations attempted to raise this threshold, but those efforts have been held up in court after being undermined by the first Trump administration.

Because the salary threshold is so low, many workers earning relatively low salaries are required to work excessive hours for no additional compensation. Lawmakers could update overtime laws so that employers would need to pay these workers overtime (and some states have.) Instead, no tax on overtime would effectively give employers overworking low-salaried staff a free pass, allowing them to potentially assuage workers’ frustration without actually compensating them the overtime pay to which they should be entitled.

For instance, a worker being paid a $50,000 annual salary and regularly being asked to work 60 hours a week might accept their employer converting them to an hourly status at a fairly low hourly wage in order to access the preferential tax treatment on their overtime. Their employer could pay them about $13.75 per hour, and if they continued to work that 60-hour work week year-round, they’d get about $4,000 more in after-tax pay, while costing the employer nothing in additional compensation. In contrast, if that worker had been automatically eligible for overtime for those extra 20 hours each week—as they would have been under the Biden administration’s overtime rule—that same worker would have earned closer to $20,000 more in annual after-tax earnings had they maintained a 60-hour weekly schedule year-round.

An even more pernicious, though very plausible, version of this scenario would be employers proactively reclassifying overtime-exempt employees as hourly, scheduling them for overtime, and then paying them hourly wages such that they receive the same after-tax pay as before. In this scenario, workers would see no real tax benefit despite working extra hours, while their employer would benefit from reduced labor costs.

No tax on overtime is ripe for abuse by high earners, straining public budgets while further complicating the tax code

This same type of gaming that could exploit lower-paid salaried workers could also easily be used to give tax breaks to highly paid salaried workers, who already expect to work long hours. Any hourly, W-2 worker is eligible for overtime, no matter how much they earn. Employers could switch a highly paid executive to an hourly status and set their hourly wage so that, with overtime, they are being paid the same pre-tax salary as before—giving them an enormous tax windfall. As others have noted, it’s easy to imagine a corporate CEO being paid a $4,000 hourly wage and earning $6 million in overtime, which would not be taxed.

The loss in tax revenue resulting from these proposals would be significant. According to the Yale Budget Lab’s tax microsimulation model, even before taking into account potential gaming of the system, creating a federal income tax deduction for overtime would cost an estimated $866 billion over the next 10 years. If the overtime exemption were extended to payroll taxes, the cost rises to $1.3 trillion, 77% of which would have gone to Social Security.

For state governments, the losses would also be substantial. Personal income taxes are one of the most significant revenue sources for states, allowing state governments to fund schools, maintain roads and other public infrastructure, and pay for programs and services that families and communities depend on.

In 2023, Alabama became the first and only state to exempt overtime compensation from state taxes. The law, enacted in response to rising inflation, is scheduled to sunset in mid-2025. The Alabama exemption cost the state $230 million in the first nine months of 2024 alone and is projected to cost $345 million by the time it expires. Because income taxes are the largest source of revenue for public education in Alabama, the exemption denied millions in needed funding for the state’s Education Trust Fund. State officials explained that the true costs were more than $45 million higher than projected because the state lacked data on how much employers paid in overtime.

Further, fiscal analyses for 2025 bills in West Virginia and Virginia have estimated annual revenue losses at $70 and $121 million, respectively, in the first year alone. Given the limitations in existing overtime data, as in the case of Alabama, projections of the impact of overtime tax exemptions likely underestimate the actual costs of these proposals.

Exempting overtime from taxation would also make the tax code more complex, both for tax agencies to administer and for employers to follow. At the federal level, Internal Revenue Service (IRS) reporting requirements do not ask employers or employees to distinguish between regular pay and overtime pay. The IRS would have to modify tax forms for employers to report information on workers’ hours and delineate between regular wages and overtime earnings. State tax agencies would also need to revise accounting systems and potentially hire new staff to maintain accurate overtime records.

There are better ways to help workers facing long hours and low pay

The alleged motivation for exempting overtime from taxation is that workers should be rewarded in the tax code for their willingness to work extra hours. But, as described, those tax benefits are dubious if they’re accompanied by weaker base wages or cuts in public services on which workers and their families rely. If lawmakers are serious about helping these workers, there are much better options that wouldn’t exacerbate overwork or threaten public budgets.

To start, lawmakers could strengthen existing overtime laws in a variety of ways including:

• Increasing the overtime rate from 1.5 times base pay to 1.75 or even two times base wages. This would disincentivize employers from requiring excessive hours while making it a better deal for workers when they are asked to work overtime.
• Raising the decades-old overtime salary threshold to make more workers automatically eligible for overtime pay when they work more than 40 hours in a week.
• Ending racist carveouts that exclude agricultural workers and live-in domestic workers from overtime eligibility.
• Bolstering labor enforcement to stop employers from misclassifying workers as exempt from overtime compensation.

Lawmakers could also have overtime kick in earlier—say, after 32 or 35 hours worked per week. Not only would this satisfy broad public support for a shorter work week, but it would also help workers with care responsibilities. These workers would either gain more time to spend with children, family, and others, or if they maintained a 40-hour work week, they’d have extra earnings to help offset costs of child care, elder care, or other related needs.

The strongest policy lawmakers could enact to help working people would be labor law reforms that make it easier for workers to form unions. Having access to a union would help workers negotiate fair wage and hours policies with their employer, tailored to those workers’ needs and the needs of that business or industry.

In the end, exempting overtime from taxes is not a real pro-worker policy. Instead, it is a giveaway to businesses that would create new inequities in the tax code while expanding employer power and draining public budgets of resources for all the things—schools, infrastructure, safety, health—that workers, their families, and their communities actually need to thrive.