Ex-president Donald Trump A new proposal to exclude tips from federal taxes is getting strong reviews from some Republican lawmakers, although serious questions remain about the impact of the policy and how it will work.
What is certain is that the tip tax change will affect millions of people. The U.S. Bureau of Labor Statistics estimates there are 2.24 million waiters and waitresses in the country, and tips make up a significant portion of their income.
Let’s take a look at what Trump is proposing and the possible political and economic consequences:
Trump Presentation in Nevada Election Year
Trump announced his tax-free tipping plan at a June 9 rally in Nevada, a key state with six electoral votes in the race for the White House. President Joe Biden won the state in 2020, but the Trump campaign hopes to tap the state this fall.
Nevada has the highest concentration of tipped workers in the country, with about 25.8 waiters and waitresses per 1,000 jobs, followed by Hawaii and Florida.
“Those hotel workers and people who get tips are going to be very happy because when I come into office, we’re not going to tax the tips, the people who tip,” Trump said at the rally. “… We’re going to do it right now, first thing in the office.”
This presentation creates a stark political contrast between Democrats and Republicans. While Trump suggests the tax cuts will help workers, Democrats generally support efforts to increase hourly wages — and it remains an open question which approach resonates more with voters.
The Culinary Union, which represents 60,000 workers in Las Vegas and Reno and supports Biden, called Trump’s plan a stunt.
“The relief is definitely needed for tipped earners, but Nevada workers are smart enough to know the difference between real solutions and the wild campaign promises of a convicted felon.” This was stated in a statement by Culinary Union Secretary-Treasurer Ted Pappageorge.
Lael Brainard, director of the White House National Economic Council, declined to discuss the idea floated by Trump because, as a federal employee, she is not supposed to discuss campaign politics.
“What I can say is that President Biden has fought for real solutions that actually address workers’ legitimate need for fair wages, and we think much more effectively,” she said, adding that workers tipped workers in Nevada would see an income boost of $6,000 through an increase in the minimum wage and the elimination of tipped minimums.
How will the tax exemption work?
Trump did not specify whether he wants to exempt tips only from income taxes or also from payroll taxes. The payroll tax funds Medicare and Social Security.
For workers, a full exemption would mean an increase in take-home pay. And for the federal government, this could mean a larger budget deficit.
The Committee for a Responsible Federal Budget, a nonpartisan fiscal watchdog group, has estimated that exempting tips from income and payroll taxes would reduce federal revenue by $150 billion to $250 billion over the next decade.
The committee said making tips tax-exempt would also lead employers and employees to reclassify wages as tips where possible. The more this happens, the more the federal budget deficit will increase. For example, a 10% increase in tips would raise the committee’s forecast for federal revenue losses to a range of $165 billion to $275 billion over the next decade.
Congress is certain to review Trump’s proposal for the tips as it considers which parts of the 2017 Tax Cuts and Jobs Act could expire after next year, including lower individual tax rates. Lawmakers are already preparing to tackle this task, although many did not think about Trump’s proposal until recently.
Rep. Vern Buchanan, R-Fla., a senior member of the House Budget Committee, said lawmakers will have to consider the total cost of the tipping proposal and how to pay for it.
“I want to be sensitive because they work a lot, they don’t have enough waiters, and obviously most of their earnings come from tips,” Buchanan said. “All these programs sound good. Everyone would like to pay less taxes, but we have bills to pay.”
“I know he’s trying to provide as much help as possible to people at that income level. Maybe we can do the same thing by making his tax cuts more permanent and more likely to reach low-income people,” said Rep. Kevin Hurn, an Oklahoma Republican who also serves on the Budget Committee, which has jurisdiction over tax policy.
Tradeoffs associated with no tax tips
Like many tax proposals, Trump’s push to exempt tips from the tax could have unintended consequences.
Howard Gleckman, senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, asserts that Trump’s proposal could backfire on many tipped workers.
For example, some customers may respond to a tax-deductible tip by reducing the tip amount. Second, it could undermine efforts by some states to gradually increase the minimum wage for tipped workers so that their base wage is in line with the minimum wage for other workers.
“The lure of tax-free income may turn many workers against the shift from tips to wages,” Gleckman wrote in a blog post.
Gleckman also questioned why a service industry worker should avoid paying taxes on tips but not a warehouse worker who earns the same amount. He noted that while Trump has promised to immediately repeal the tip tax, only Congress can eliminate federal taxes, and “for reasons of efficiency, fairness and sound tax administration, let’s hope that doesn’t happen.”
Looking ahead
Democrats have largely dismissed Trump’s proposal as a ploy to win over voters.
Sen. Debbie Stabenow, a senior member of the Senate Finance Committee, noted that she worked as a waitress in college, calling it “really hard work.” She favors raising the minimum wage for tipped workers to match the minimum wage for other workers.
“From my perspective, I don’t think (Trump’s) proposal is serious, and I don’t think it does enough to address the problem of working people with low wages,” Stabenow said.
Sen. Ron Wyden, chairman of the Senate Finance Committee, said Trump has “tossed out a lot of ideas on the fly” but his record as president reflects an emphasis on tax breaks for the wealthy and corporations.
“All these things he throws out every day, I’ll believe it when I see it,” Wyden said.
But Trump’s enthusiasm for the idea appears to be growing. The tax promises have since become a major theme of Trump’s rallies and meetings, and he announced his proposal during a meeting with GOP lawmakers and business leaders in Washington last week.
“I think this is actually a very smart idea. The men and women who rely on tips for their income are working their butts off,” said Sen. Ron Johnson, R-Wis. “This is very good targeted tax reform.”
Some lawmakers and their allies began tweeting photos of their restaurant bills with handwritten messages meant to spread the word about Trump’s promise. Rep. Derrick Van Orden, R-Wisconsin, wrote, “Vote Trump!” and “No tip tax!” on his account from a restaurant in Milwaukee.
Musician Kid Rock, a known Trump supporter, shared a photo on X.
“A vote for Trump is a vote for no tip tax!!” he wrote on the receipt. Judging by the photo, he paid $400 for a $1,143 bill at a high-end steakhouse.