VBoth President Kamala Harris and former President Donald Trump have endorsed eliminating the federal tip tax, a rare case of agreement between the two campaigns as they seek to influence a crucial bloc of voters.
While this measure may address some of the immediate concerns of service and hospitality workers, it has sparked considerable debate about its budgetary implications, its fairness and its potential impact on the labour market as a whole.
At a rally in Las Vegas on Saturday, Harris unveiled her proposal to eliminate taxes on tips, positioning it as a potential cornerstone of her upcoming economic program. “I promise everyone here: If I’m president, we will continue our fight for America’s working families, including by raising the minimum wage and eliminating taxes on tips for service and hospitality workers,” she said at the University of Nevada. Las Vegas.
A Harris campaign official told TIME that the proposal needs to be enshrined in law and that she would push for it alongside a minimum wage increase: “As president, she would work with Congress to develop a proposal that would put an income cap and strict requirements to prevent hedge fund managers and lawyers from structuring their compensation in a way that would try to profit from this provision,” the official says.
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Harris’ proposal comes after Trump floated a similar policy in June following a conversation with a Las Vegas waitress in which he highlighted the financial burden of taxed tips. “The hotel workers and people who get tips are going to be very happy because when I get into office, we’re not going to raise taxes on tips, on people who tip,” Trump said at a rally. “We’re going to do that right now, right at the beginning of my term.”
Trump has accused Harris of adopting his policies for political purposes. “This was TRUMP’s idea – she has no ideas, she can only steal from me,” Trump posted on Truth Social on Saturday, branding Harris a “copycat Kamala.” Trump’s campaign has also said Harris’ stance contradicts previous proposals by the Biden administration to implement a voluntary tip reporting program.
Economists say the proposed elimination of the tip tax could have profound effects on both federal revenues and the labor market.
The Center for a Responsible Federal Budget (CRFB) estimates that Harris’ proposal to exempt tips from federal income tax and raise the minimum wage would increase budget deficits by $100 billion to $200 billion over the next decade, while Trump’s proposal to eliminate the federal tax on tips could cost as much as $250 billion. The conservative-leaning Tax Foundation estimates that eliminating the tip tax could cost around $107 billion over the next decade due to a decline in revenue from income and payroll taxes that currently fund Social Security and Medicare. The potential deficit has raised concerns about how such a policy would affect the already strained federal budget.
However, proponents argue that eliminating the tip tax would reduce the financial burden on service workers, many of whom rely on tips for their livelihood. Currently, tips are considered taxable income, requiring both accurate reporting by employees and enforcement by the Internal Revenue Service (IRS). The IRS has struggled with compliance and enforcement, which has led to ongoing debates about the fairness and feasibility of taxing tips.
An estimated 4 million workers regularly receive tips—less than 3% of the total workforce, according to an analysis by Yale University’s Budget Lab. The legal minimum wage for tipped workers is $2.13 an hour, but they must earn at least the legal hourly minimum wage of $7.25 in tips or their employers must make up the difference.
Critics believe the policy would exacerbate existing inequities in the tax system. Andrew Lautz, deputy director of the economic program at the Bipartisan Policy Center, warns that the policy could create a two-tier system in which tipped workers enjoy a significant tax advantage over their non-tipped counterparts. This inequality could distort wage structures and encourage employers to convert more pay into tips to benefit from lower tax rates.
“So should we say that someone who makes $18 an hour at a fast-food restaurant should be treated differently from a tax perspective than someone who makes $18 an hour at a restaurant including tips?” Lautz asks. “Policymakers need to carefully consider what that means for equity in the U.S. economy and for the jobs that people seek.”
For example, the rule could lead to more industries – such as grocery stores – adopting tipping practices similar to those in the restaurant sector, which would increase the overall cost of the rule. The proposal could also lead to increased pressure on workers to demand tips, potentially leading to less predictable and less stable incomes.
Lautz also raised concerns about the administrative challenges involved in implementing such a rule. “There is always the potential for abuse or disregard of such rules,” he says. “The intent is not to have high-paid lawyers and accountants reclassify their income as tips and thus avoid taxation.” He says Congress needs to either enact specific rules or direct the IRS to enact regulations that limit abuse or disregard of the rule not to collect taxes on tips.
Both the Harris and Trump campaigns have not yet put forward detailed policy proposals, leaving many unanswered questions about how their plans will be implemented and financed. The next administration will face significant challenges in addressing these questions, particularly as large portions of the 2017 tax cuts are about to expire and broader discussions about tax reform loom.
Nevertheless, the exemption from tips has already gained bipartisan support on Capitol Hill. In July, Democratic Senators Catherine Cortez Masto and Jacky Rosen of Nevada signed the No Tax on Tips Act, proposed by Republican Senator Ted Cruz of Texas. A corresponding bill has been introduced in the House of Representatives.
President Joe Biden also supports repealing the tip tax, White House press secretary Karine Jean-Pierre said Monday. The Culinary Workers Union, a powerful union in Nevada, initially called Trump’s proposal a “wild campaign promise” but now supports the idea.
