Source: CNN
With the presidential campaign heating up, both former President Donald Trump and Vice President Kamala Harris are making a play for service and hospitality workers’ votes by promising to eliminate taxes on tips.
But the move likely wouldn’t help many tipped workers, largely because a sizable share don’t earn enough to pay federal income taxes, experts say.
Neither Trump, who announced the idea at a Las Vegas rally in June, nor Harris, who voiced her support for the policy in Las Vegas on Saturday, have released detailed proposals, which would have to go through Congress. Among the questions are how much tipped income would be free of taxes, whether any guardrails would be put in place to prevent fraud and abuse and whether both federal income and payroll taxes would be eliminated.
Harris would couple her plan to eliminate taxes on tips with a push for Congress to raise the minimum wage, a Harris campaign official said. Also, the proposal would include an income limit and prevent hedge fund managers and lawyers from structuring their compensation to try to take advantage of the policy. Tips would remain subject to payroll taxes.
Trump on Tuesday suggested he supported eliminating federal income and payroll taxes on tips, clarifying that his proposal would cover both levies.
“We’re looking at doing the full bore,” Trump said in an interview with Spectrum News 1 in North Carolina when asked if he supported eliminating both federal income and payroll taxes. Such a measure would require congressional approval.
Soon after Trump promised in June to get rid of taxes on tips, Republican Sen. Ted Cruz of Texas introduced a bill titled “No Tax on Tips Act,” which would allow workers to deduct tips paid by cash, check, credit card and debit card on their federal income taxes. However, it would not eliminate federal payroll taxes, which fund Social Security and Medicare and total 15.3%, half of which is paid by employers.
The legislation is supported by Democratic Sens. Jacky Rosen and Catherine Cortez Masto of Nevada, a key swing state where many residents work in the hospitality industry.
Other bills introduced in the House include different provisions, such as eliminating both federal income and payroll taxes or placing a cap on the amount of tip income that could be excluded from taxes.
Who gets tips
About 4 million people worked in tipped occupations in 2023, or about 2.5% of all employment, according to the Budget Lab at Yale University, a policy research center. They include waiters, bartenders, for-hire drivers, food delivery workers, hairdressers and hotel staffers, among others. More establishments, such as quick-service restaurants, have added tipping options in recent years.
The federal minimum wage for tipped workers is $2.13 an hour, but they must make at least the federal hourly minimum wage of $7.25 or their employers have to cover the difference. Many states and municipalities have higher minimum wages and minimum tipped wages, while some states have eliminated lower minimum wages for tipped workers.
Tipped workers are typically younger and lower paid. Their typical weekly wage in 2023 was $538, including tips, compared with $1,000 for non-tipped workers, according to the Budget Lab.
That means many earn too little to owe federal income taxes – 37% of tipped workers fell into this category in 2022, the Budget Lab found.
“If you don’t pay income tax right now, it’s not going to help you very much,” Ernie Tedeschi, the Budget Lab’s director of economics and former chief economist at the White House Council of Economic Advisers in the Biden administration, said of the proposals to end taxes on tips.
What’s more, nearly two-thirds of tipped restaurant workers would not benefit from the proposals since they don’t earn enough to pay federal income taxes, according to an analysis by One Fair Wage, an advocacy group.
The proposals wouldn’t do much for low- and moderate-income workers in general. Even among workers at the bottom of the income ladder making less than $17.66 an hour, only 5% are in tipped jobs, the Budget Lab found.
“This is good politics, but bad policy,” said Erica York, senior economist and research director at the Tax Foundation, a right-leaning think tank.
York expressed concern that eliminating taxes on tips would be overly complicated and unfair to workers other than the “tiny slice” who would benefit.
“The fact the Harris campaign is talking about guardrails and income limits gives you a hint there might be some problems,” York said. “It fails on equity grounds and neutrality.”
Also, it’s unclear how employers and customers could react to such a policy change. For instance, if more workers flock to tipped jobs, employers could try to pay them less in wages, Tedeschi said. Or companies could try to shift more positions – such as ones that rely on commissions – to tipped jobs. And customers, many of whom already have tipping fatigue, might resist and tip less.
The powerful Culinary Workers Union Local 226 in Nevada, however, said it supports ending taxes on tips for service and hospitality workers, as well as raising the federal minimum wage.
Culinary Union Secretary-Treasurer Ted Pappageorge praised Harris, whom the union endorsed last week, saying in a statement Saturday that she “acknowledged the hard working men and women of the hospitality industry.”
However, when Trump floated the proposal in June, Pappageorge said, “Relief is definitely needed for tip earners, but Nevada workers are smart enough to know the difference between real solutions and wild campaign promises from a convicted felon.”
The union changed its position because there are now bills in Congress that have support from Nevada senators and representatives, including two lawmakers who were former Culinary Union members, said Bethany Khan, a union spokesperson.
This “enables hospitality workers to have a seat at the table as conversations around the bill continue to develop,” she told CNN.
Hurting the federal budget
Removing federal taxes on tips would also increase the federal budget deficit, though the amount would depend on what provisions the legislation contains.
Just excluding tips from federal income taxes could reduce revenues by at least $107 billion over 10 years, according to the Tax Foundation.
If both federal income and payroll taxes were eliminated, it would lower revenue by $150 billion to $250 billion over a decade, according to the Committee for a Responsible Federal Budget. Just getting rid of federal income taxes on tips would lead to a loss of about half that size.
This story has been updated with additional information.