Someone should have spent a bit more time studying the implications of exempting overtime pay from taxes. They would have discovered what a bad idea it is.

Both the Trump administration and lawmakers in Oregon have called for eliminating taxes on all income earned from overtime pay. While such a move might sound like a way to support hardworking Oregonians, the reality is that this policy would harm the vast majority of workers while opening new avenues for the rich to game the tax system.

Overtime laws require employers to pay workers a premium, usually time-and-a-half, for hours worked beyond 40 per week. This rule applies only to workers paid on an hourly basis, excluding salaried workers. 

The purpose of overtime pay is to discourage employers from requiring employees to work excessively. The rule was one of the great victories of the labor movement in the 1930s. Before then, many workers toiled long days in factories, to the detriment of their health.

Generally, people don’t work overtime because they want to. They do so because their jobs don’t pay enough or because their employer demands it. Most people would rather have more time to spend with their families, pursue a hobby, or just rest. Exempting overtime from taxes might incentivize some workers to work more, but it would come at a cost. What workers really need are jobs that pay more.

Exempting overtime from taxes would introduce more inequities into the tax system, giving a tax break to some workers but not others. Many workers cannot receive overtime pay because they are salaried employees, because they juggle multiple jobs to make ends meet, or because they have caretaking responsibilities at home.  

To illustrate some of the unfairness, consider three different workers: 

First, we have Jose, an hourly worker working 40 hours per week at $20 an hour. That amounts to  $41,600 in a year. He also works 10 hours of overtime per week, adding another $15,600 to his yearly income, for a total of $57,200. With overtime pay exempt from taxes, Jose would only pay taxes on $41,600. 

Second, we have Larry. He works two part-time jobs to make ends meet. Both jobs total 55 hours per week and the pay averages out to $20 per hour. Though Larry works more hours than Jose, his yearly income is the same. Yet Larry would pay significantly more taxes.

Finally, Mary is a salaried employee, not subject to overtime pay. She also puts in an average of 50 hours per week, and her annual salary is roughly equal to that of Jose. She gets no tax break. 

By its very nature, exempting overtime pay is unfair, giving a tax benefit to some workers but not others working just as hard. 

It also creates another tax loophole for the rich to exploit. A CEO with a salary of $5.6 million, for example, would have a new incentive to change her compensation from salary to hourly and maximize overtime hours. She could set her hourly pay at $20,000. At 40 hours per week, she would make about $4 million.  Working 10 hours per week in overtime, she would add another $1.6 million to her annual income. But because overtime is not taxed, she would pay not a penny in taxes on that $1.6 million.

This gaming of the system wouldn’t be limited to CEOs. It’s not hard to imagine highly paid professionals like lawyers at big law firms or financial advisers exploiting this new loophole.

On top of the inequities the rule would create, exempting overtime pay from taxation would shrink the revenue available to invest in our communities. Over time, this kind of carve-out could siphon off hundreds of millions of dollars from schools, health care, and other vital public services that benefit all Oregonians. 

The bottom line is that exempting overtime pay would only benefit a narrow slice of workers, putting all other workers at a disadvantage. CEOs and highly paid professionals would be in the best position to exploit such a rule. Meanwhile, all Oregonians would bear the cost in the form of fewer resources for schools and other public services.  

What would truly help workers is better pay. Lawmakers in Washington D.C. and Salem can do a lot in that regard, not least removing the obstacles that workers face in bargaining collectively for better wages and working conditions. 

Exempting overtime pay from taxes is a gimmick, not a real solution for what ails hardworking Oregonians.