Executive Summary

• President Trump’s call to alter federal tax law to exempt overtime compensation from taxation has gained steam: several bills have been introduced in Congress and the proposal may be included in the upcoming reconciliation bill.
• While this policy would put more money into the pockets of workers who regularly work overtime, it would also create unintended consequences that could affect roughly 97.7 million overtime-eligible workers—including changes in employer and employee behavior that would result in decreased average wages in affected markets and create winners and losers.
• Instead, Congress should look to design tax policy that is pro-growth, minimizes market distortions, and does not penalize nor give preferential treatment to certain types of work.

Introduction

In recent months, the call to alter tax law to exempt overtime compensation from taxation has gained steam: President Trump first endorsed such a policy on the campaign trail, and has continued to push the idea since taking office; several bills have been proposed in Congress, including the KEEP Act, the Overtime Pay Relief Act of 2025, and the No Tax On Overtime Act; and the proposal may be included in the upcoming reconciliation bill. Several states are also considering the idea. While this policy would put more money into the pockets of workers who regularly work overtime, it would also create unintended consequences that could affect roughly 97.7 million overtime-eligible workers—...

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