‘No tax on tips’ is a political winner, but it could face a tough path to reality

The Trump and Harris presidential campaigns are courting servers, bartenders and hotel housekeepers with promises to eliminate federal taxes on tips, but enacting their plans would be difficult and could have unintended consequences.

Without taxes on tips, customers might give less and employers might shirk pay raises because they figure untaxed gratuities give workers a windfall, analysts say.

“It could put downward wage pressure on jobs where that’s an option because of the lack of tax on the tips,” said Garrett Watson, a senior policy analyst at the Tax Foundation.

Congress must set up guardrails to prevent client-based professionals from declaring portions of their pay as tipped wages.

“Lawyers, consultants — anyone with a client where they could sort of characterize something as a tip,” Mr. Watson said. “All that needs to be dealt with.”

Billions of dollars in lost revenue would force lawmakers to grapple with trade-offs in broader tax plans or other legislation.

The gritty details haven’t stopped former President Donald Trump from making “no tax on tips” a core plank of his populist agenda, alongside eliminating taxes on Social Security benefits and overtime pay.

Vice President Kamala Harris took Mr. Trump’s idea months later and paired it with a proposed increase in underlying wages.

Ms. Harris will “fight to raise the minimum wage, end sub-minimum wages for tipped workers and people with disabilities, establish paid family and medical leave, and eliminate taxes on tips for service and hospitality workers,” the campaign says in a policy webpage.

The candidates are making a play for voters in Nevada, a swing state with hundreds of thousands of leisure and hospitality workers who rely on tipped wages. Under current law, tips are taxed at the same rate as standard income, though cash tips often go unreported.

Sen. Ted Cruz, Texas Republican, backed up Mr. Trump’s campaign rhetoric with a three-page bill allowing taxpayers to claim a 100% deduction on tipped wages when filing taxes.

Sens. Catherine Cortez Masto and Jacky Rosen, Nevada Democrats, are co-sponsoring the bill. Rep. Byron Donalds, Florida Republican and vocal Trump ally, introduced companion legislation in the House.

Analysts say the overall impact of eliminating the federal tax on tips would be small despite the political stakes.

The Budget Lab at Yale estimates that 4 million Americans, or only 2.5% of the national workforce, were in tipped occupations in 2023.

It said tipped workers tend to be much younger than non-tipped workers, and many have low federal income tax liability. More than one-third of tipped workers, or 37%, had incomes low enough to avoid federal income tax in 2022.

“This suggests that the direct effect of the [no tax on tips] bill on the workforce as it stands today — before accounting for behavioral changes — would be small,” the analysis said.

The idea makes some voters happy this campaign season.

“I don’t know how they’re going to work out ‘no tax on tips.’ I think it’s fantastic, though,” Simone Barron, a restaurant worker and co-founder of the Full Service Workers Alliance, told House lawmakers Tuesday. She said liberal wage hikes in Seattle were destabilizing for tipped workers.

Republican leaders on the House Education and the Workforce Committee called the hearing to rally around the “tip credit rule,” which allows restaurants and other hospitality businesses to count an employee’s tips toward the federal minimum wage. Some workers’ hourly base wages are as low as $2.13 because tips ensure their pay meets the $7.25 federal minimum.

Republicans said the median tipped worker earns far more, about $27 an hour, and Democratic efforts to erode the credit rule would force restaurants to raise prices, reduce staff and close.

“This system has worked for years,” said Rep. Kevin Kiley, California Republican. “Unfortunately, across the country, we’re seeing anti-worker policies that phase out the tip credit altogether.”

A Biden-Harris administration rule issued in 2021 to restrict the tip credit rule was struck down in the courts, but Republicans said Ms. Harris remains a threat to industry viability.

“The tip credit is vital to restaurants like mine. It allows employees to earn significantly more than the federal minimum wage while helping restaurants manage labor costs,” said Tom Boucher, CEO and owner of Great NH Restaurants Inc., who testified on behalf of the National Restaurant Association.

Saru Jayaraman, president of One Fair Wage, said it is absurd that tips are part of a minimum wage instead of something on top of a wage. She said tips are unreliable and fluctuate based on customers’ whims.

“Tipped workers are overwhelmingly women, disproportionately women of color,” Ms. Jayaraman said.

Ms. Harris won over the Culinary Workers Union Local 226 partly by vowing to pair her no-tax-on-tips proposal with an end to the subminimum wage.

“As the largest organization of working women in Nevada, the chance to elect the first woman president of the USA is both energizing and historic and we are ready to make history together,” the union said. “Culinary Union has led the fight for over 30 years for fair taxation on tips and our union supports the ban on taxes on tips.”

Since June, Mr. Trump has generated buzz for his pitch and even urged supporters to write, “Vote for Trump for NO TAX ON TIPS!” on receipts.

He decried Ms. Harris as a “copycat” for adopting the idea, saying it showed she had no ideas of her own.

Eliminating taxes on tipped wages would cost the government about $107 billion over 10 years, according to the Tax Foundation, though the projection does not account for possible changes in behavior and reliable estimates are difficult to determine because some workers don’t report cash tips.

Analysts say tax evasion is harder today than decades ago, when tipping was mainly a cash-based honor system. A 2018 Treasury Department inspector general’s report estimated that nearly $1.7 billion in annual tips went unreported.

Individual income tax cuts from the Republican overhaul of 2017 expire at the end of 2025, so Congress and the White House will likely draft a major deal on tax policy.

It could be the ideal vehicle for the plan to end taxes on tips. Tax policy isn’t typically changed through stand-alone bills.

Dealmakers must consider whether “no tax on tips” is more critical than other provisions to pay for their policies or allow deficits to grow.

Mr. Boucher said he was skeptical of the candidates’ plans to eliminate the tax on tips.

“I do feel like it’s a political statement because of the election that’s coming up,” Mr. Boucher said. “Where is the federal government going to get the money to reconcile all those taxes that aren’t going to come in?”