With the presidential campaign heating up, both former President Donald Trump and Vice President Kamala Harris are both targeting service and hospitality workers by promising to eliminate taxes on tips. However, experts argue that this policy may not benefit many tipped workers, as a significant portion of them do not earn enough to pay federal income taxes. Both Trump and Harris have not released detailed proposals, which would need to go through Congress, and questions remain about how much tipped income would be tax-free, what safeguards would be in place, and whether both federal income and payroll taxes would be eliminated.
Harris’s plan to eliminate taxes on tips would be coupled with a push to raise the minimum wage and would include income limits to prevent abuse of the policy by certain high-earning professions. Tips would still be subject to payroll taxes. Republican Senator Ted Cruz introduced a bill titled the “No Tax on Tips Act” after Trump’s announcement, which would allow workers to deduct tips paid through various methods on their federal income taxes but would not eliminate federal payroll taxes. Some Democratic senators in key swing states, like Nevada, support this legislation.
About 4 million people worked in tipped occupations in 2023, making up around 2.5% of all employment. Tipped workers typically earn a lower wage than non-tipped workers, with many not earning enough to owe federal income taxes. This means that proposals to end taxes on tips may not have a significant impact on a large portion of tipped workers. Concerns have been raised about the complexity of implementing this policy and the potential impact on other workers and employers.
Removing federal taxes on tips would also have implications for the federal budget deficit, with estimates suggesting that excluding tips from federal income taxes could reduce revenues by at least $107 billion over 10 years. If both federal income and payroll taxes were eliminated, it could lower revenue by $150 to $250 billion over a decade. The Culinary Workers Union Local 226 in Nevada supports ending taxes on tips for service and hospitality workers and raising the federal minimum wage, but some have expressed concerns about the potential challenges and unintended consequences of these proposals.
Overall, the proposal to eliminate taxes on tips is seen as good politics but potentially bad policy by some economists and experts. Concerns have been raised about fairness, complexity, and unintended consequences of implementing such a policy. While there is support for the idea from certain groups and legislators, there are still many unanswered questions about how it would be implemented and what its ultimate impact would be. With the campaign season in full swing, the debate over taxes on tips and other worker-related issues is likely to continue as lawmakers and candidates seek to appeal to service and hospitality workers.
