In a close vote, the House of Representatives approved a Republican-backed budget plan that includes a proposal to eliminate the federal tax on overtime pay. This plan, supported by former President Donald Trump, faced strong opposition and nearly didn’t pass.
Concerns ranged from its impact on the federal deficit to significant cuts in Medicaid, a program that provides health coverage for 72 million low-income individuals.
Tennessee Rep. Tim Burchett and two other conservative lawmakers initially withheld their support, citing worries about the deficit. However, they eventually changed their votes, allowing the bill to pass by a slim margin of 217-215. Despite this, Rep. Thomas Massie of Kentucky joined Democrats in voting against it.
The budget combines several of Trump’s campaign promises, including tax cuts and plans to eliminate taxes on tips, Social Security benefits, and overtime pay.
What Does Eliminating Taxes on Overtime Mean?
If approved, workers working extra hours would no longer pay federal taxes on overtime earnings. This change could result in larger paychecks for those logging extra time.
However, some experts caution that the policy could be exploited. Richard Pon, a CPA from San Francisco, pointed out that employers might classify more income as overtime to take advantage of the tax exemption. Trump has suggested adding unspecified “guardrails” to prevent such abuse.
This change isn’t happening right away. Although the House passed the budget plan, it still needs approval from the Senate, which has its ideas for the budget.
Given the narrow margins in both chambers of Congress, agreeing on a final budget could take some time. Past negotiations have even led to government shutdowns, so a drawn-out process is likely.
How Much Revenue Could Be Lost?
The potential revenue loss is significant. The Committee for a Responsible Federal Budget estimates the plan could reduce government income by $250 billion to $1.4 trillion. If all eligible workers shifted to hourly pay to benefit from the tax cut, losses could rise to $1 trillion to $5 trillion.
The plan includes new tax cuts and extends those from the 2017 tax reform, which would cost around $4.5 trillion. Lawmakers must find $2 trillion through spending cuts or reduced tax breaks to compensate. The proposed cuts would likely affect Medicaid and food assistance programs like SNAP.
Additionally, $300 billion is earmarked for defence and border security spending. These changes could raise the debt ceiling by $4 trillion over two years and add $3 trillion to the deficit over the next decade.
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