Former President Donald Trump has so far revealed few details about his economic policies for a possible second presidency, but he made headlines with his proposal to eliminate the federal tax on tips for service workers.
The proposal aims to attract working-class voters, even though only 2.5 percent of all workers receive tips. Of those, 12.6 percent are young people who are not eligible to vote, and 37 percent had incomes so low that they did not have to pay federal income taxes.
This policy has sparked both enthusiasm and criticism, with Vice President Kamala Harris even endorsing the idea.
As Senate Republicans rapidly advance related legislation, it is critical to examine the broader implications, particularly in the wake of the Supreme Court’s ruling in Snyder v. United States.
During a campaign rally in Nevada in June, Trump introduced this proposal, which he has since made a central part of his platform. Some Republican senators have introduced the “No Tax on Tips Act.” If the law is passed, taxpayers would be able to deduct 100 percent of their tipped wages from their taxes.
The proposal could result in a significant decline in federal revenue, estimated by the Committee for a Responsible Budget to be between $150 billion and $250 billion over the next decade.
The Congressional Budget Office estimates that these cuts, if extended beyond 2025, would cost nearly $4 trillion between 2025 and 2035. This measure follows on the heels of the tax cuts Trump introduced during his first term, when the corporate tax rate was reduced from 35 percent to 21 percent and a further 20 percent cut was promised.
Supporters argue that the bill provides much-needed relief for service workers who derive a significant portion of their income from tips. But critics from both camps question the effectiveness and fairness of the proposal.
The Wall Street Journal editorial board and experts at the Urban Institute and the Tax Policy Center at the Brookings Institution believe the proposal could ultimately harm many workers and slow down efforts to raise the minimum wage.
To understand the potential legal implications of Trump’s proposal, it’s important to look back at the Supreme Court’s ruling in Snyder v. United States. In that June ruling, the court addressed the issue of tax exemptions and the federal tax system itself.
The case concerned the legality of paying “gratuities” or “tips” to government officials under the federal anti-bribery law and whether “Section 666 criminalizes gratuities… payments in recognition of acts the official has already performed or has agreed to perform, without any agreement to receive compensation for those acts.”
In its 6-3 decision, the court sent the case back to the lower court, which ruled that Section 666 “prohibits bribes to state and local officials but does not make it illegal for those officials to accept rewards for their past actions.”
In his majority opinion, Justice Brett Kavanaugh referred to former Justice Anthony M. Kennedy’s ruling in Citizens United and concluded that bribes and tips are not the same thing:
“Bribes are payments made or agreed upon prior to an official act in order to influence the official with regard to that future official act. … (Tips) are typically payments to an official after an official act as a token of appreciation.”
As Justice Ketanji Brown Jackson explained in her dissent, there is simply no difference between bribes and tips when it comes to combating public corruption: “For the interpretation of (section) 666 that prohibits tips – as it has always done – while not actually posing a threat to customary gift-giving, does meet Congress’s intent to punish rewards corruptly accepted by government officials in a manner that is functionally indistinguishable from the acceptance of bribes.”
Because the No Tax on Tips Act does not affect a large enough portion of the U.S. population to have a significant impact on the election, and because it ignores the many factors that the law could have on the economy, the question arises whether the law could really be a direct response to these newly legalized “bribes.”
While at first glance the law appears to bring a clear advantage to employees in the service sector, the effects are far-reaching: It could lead to major revenue losses for the federal government and an exacerbation of wage stagnation.
Most importantly, the ruling in Snyder v. United States raises questions about the intent of the law and its potential for far-reaching legal consequences. As lawmakers and the public consider this proposal, we must weigh the immediate benefits against the long-term consequences for our country’s ethical governance.
