Few words sound better to a worker’s ears than “raise” and “less tax.” When those two ideas appear in the same sentence — especially in the context of overtime — the topic quickly moves from political rhetoric into the wallets of millions of Americans.
At the center of this debate is a legislative proposal gaining momentum in Washington: the federal income tax exemption on part of overtime earnings. Pushed by Republican leaders and reinforced by former President Trump’s campaign speeches, the idea is starting to take concrete form. Its potential effects on the labor market and tax revenue are dividing economists, politicians, and workers alike.
The promise: pay less on what you work more
In theory, the bill aims to reduce the tax burden on those who go beyond the standard 40-hour workweek. In practice, the debate centers around exempting from federal income tax the 50% increase in hourly wage — which is legally what characterizes overtime pay in the United States.
In other words, it would not be a full exemption, and it certainly would not apply to all workers. Only hourly employees, those who are legally entitled to time-and-a-half for overtime, would benefit. Fixed-salary workers, such as most white-collar professionals, teachers, and administrative roles, would likely be left out.
Additionally, the proposal does not eliminate other taxes: payroll taxes (such as Social Security and Medicare) and potential state income taxes would still apply.
Who stands to gain — and who could lose
Supporters of the measure argue that it would provide meaningful relief for families who rely on overtime to make ends meet. While the House Ways and Means Committee debated the bill last month, Representative Jason Smith, a Republican from Missouri and chairman of the tax-writing panel, gave the example of a constituent earning approximately $75,000 and working around 300 hours of overtime per year, who could receive a $1,320 tax cut if the measure became law.
“This is real tax relief for one of the hardest-working people I know,” said Mr. Smith, “and there are millions and millions of workers like him across the country.”
On the other side are critics, who warn that the policy could create distortions in the labor market. According to them, companies might reclassify positions to turn salaried jobs into hourly roles, and workers might start choosing jobs with more overtime opportunities — even with lower base salaries — just to benefit from the tax break.
This could create a new kind of inequality: workers in roles with flexible schedules would have an advantage over others who, by law or industry practice, don’t have that option.
Two economists who studied a tax exemption on overtime pay in France found that the policy did not increase total working hours. Instead, they discovered that the policy — a version of which was in place from 2007 to 2012 — mainly allowed people with flexible hours to report more overtime.
“These results suggest that the outcome of the overtime tax exemption was essentially tax optimization, with no real impact on actual work duration,” wrote the study’s authors, Pierre Cahuc and Stéphane Carcillo. In an interview, Mr. Cahuc said it was too easy for some people to manipulate their schedules to save on taxes and called the policy a “bad idea.”
“Almost no country has this kind of policy,” he said, “because it doesn’t make much sense.”
The uncertainties ahead and the fiscal impact
From a budgetary perspective, the exemption comes at a cost. According to the Joint Committee on Taxation, the estimated impact is $124 billion over just four years. In Alabama, where a state-level version of the policy was implemented, the tax relief ended up being so expensive that the state chose not to renew the measure after 18 months.
Still, the federal proposal is moving forward. The bill approved by the House sets the exemption to last until 2028, aligning its expiration with other temporary tax cuts passed in the same package, such as tip income exclusions.
What this means for you
For the average American worker, the proposal represents a potential tax break — but it also raises the need for attention. As with any tax reform, the details matter. Knowing whether your role qualifies, understanding how the change would affect your paycheck, and evaluating the medium- and long-term effects are all essential steps.
For now, the measure is not yet law. But the debate is real and relevant. In a time of high inflation, rising living costs, and increasingly flexible work hours, discussing how the tax system can — or should — adapt to these transformations is more than a technical issue: it’s a matter of economic fairness.
