In the intensely divided U.S. presidential race, a surprising consensus has emerged: tips earned by workers should not be taxed. Former President Donald Trump, the Republican candidate, first introduced the idea during a rally in June. Vice President Kamala Harris, the Democratic contender, followed suit this weekend, prompting the Trump campaign to label her “Copy Cat Kamala.”
This proposal aims to capture the attention of American service industry workers such as restaurant staff, bartenders, hairdressers, and taxi drivers who rely heavily on tips as a significant part of their income.
Why Does This Matter?
Both candidates unveiled their support for the plan in Nevada, a pivotal swing state where more than 20% of the workforce is employed by restaurants and hotels, particularly in Las Vegas. Trump said his advocacy began after a waitress voiced concerns about her taxes. The Republican Party has since incorporated this policy into its platform, with several bills now circulating in Congress, supported by restaurant lobby groups.
Some Democrats, including President Joe Biden, have also expressed support. Biden’s press secretary confirmed his backing a day after Harris endorsed the plan. The conversation is gaining traction as electronic payments make tips easier to track, increasing the likelihood of underreporting a longstanding issue.
Despite the buzz, the topic of tax-free tips remains relatively niche. Nationally, an estimated 4 million workers regularly receive tips, representing less than 3% of the overall workforce, according to Yale University’s Budget Lab. Furthermore, about 37% of these workers earn so little that they do not pay federal income taxes at all.
What Are the Current Rules?
Under existing law, employees must report all tips over $20 per month to their employers, with the federal government collecting income and payroll taxes on this amount to fund programs like Social Security. In fiscal year 2018, Americans reported $38 billion in tip income, averaging just over $6,000 per taxpayer. For some, tips make up more than half of their hourly earnings, according to the National Employment Law Project.
What Impact Could This Have?
The financial implications of this proposal are still uncertain. Some congressional bills focus solely on exempting tips from income tax, while others propose exemptions from both income and payroll taxes. The candidates themselves have provided limited details.
The Tax Foundation estimates that eliminating taxes on tips could cost at least $107 billion over a decade, with some estimates even higher. While the idea may seem politically straightforward, some analysts argue it is not sound policy. They warn that it could shift the tax burden onto non-tipped workers and potentially encourage tipping in new professions, leading to unexpected financial consequences.
Critics also contend that this proposal could benefit employers more than workers by diverting attention from the real issue: businesses are not required to pay minimum wage to employees who receive tips.
