Both presidential campaigns are courting waiters, bartenders and hotel housekeepers with a plan to erase federal taxes on tips, but getting the plan into law won’t be easy and could have unintended consequences.
If “no tax on tips” is implemented, customers might tip less and employers might shirk pay raises because they figure workers are seeing a windfall from untaxed gratuities, 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 would need to set up guardrails to keep people in client-based professions from declaring portions of their pay to be tipped wages — even if there is no precedent for it.
“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.”
Further, the government would lose billions in revenue from no longer taxing tips, forcing lawmakers to grapple with the tradeoffs when they write the idea into a broader tax plan 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 copied Mr. Trump’s tips idea months later, pairing 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 home to 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 that would allow taxpayers to claim a 100% deduction at filing for tipped wages.
Both Democratic senators from Nevada, Catherine Cortez Masto and Jacky Rosen, are co-sponsoring the bill, while Rep. Byron Donalds, Florida Republican and vocal Trump ally, introduced companion legislation in the House.
Analysts say the overall impact of erasing the federal tax on tips would be small, despite the political stakes.
The Budget Lab at Yale estimates there were about 4 million workers in tipped occupations in 2023, or only 2.5% of the national workforce.
It also said tipped workers tend to be much younger than non-tipped workers, and many have very low federal income tax liability. More than a third of tipped workers, or 37%, had incomes low enough that they did not have to pay 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.
But this is campaign season, and the idea makes some voters happy.
“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 after decrying liberal wage hikes in Seattle as destabilizing for tipped workers.
Republican leaders on the House Education and 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 towards the federal minimum wage. This means some workers see a base wage 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, however — about $27 an hour — and that Democratic efforts to erode the credit rule will force restaurants to raise prices, reduce staff and close restaurants.
“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 the GOP 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,” testified Tom Boucher, CEO and owner of Great NH Restaurants, Inc., who appeared on behalf of the National Restaurant Association.
Saru Jayaraman, president of One Fair Wage, said it is absurd that tips are viewed as part of a minimum wage instead of something on top of a wage. She said tips are unreliable and fluctuate based on the whims of customers.
“Tipped workers are overwhelmingly women, disproportionately women of color,” Ms. Jayaraman said.
Ms. Harris won over the Culinary Workers Union Local 226 in part by vowing to pair her no-tax-on-tips proposal with an end to the sub-minimum 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.”
Mr. Trump has been generating buzz for his pitch since June, even urging 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.
Zeroing out the tax on tipped wages would cost the government about $107 billion over 10 years, according to the Tax Foundation, though that’s on the low end because the estimate does not account for possible changes in behavior.
Beyond possible changes in tipping behavior, it is hard to get reliable estimates because some workers don’t report their cash tips.
Analysts believe tax evasion is harder today than it was decades ago, when tipping was mainly a cash-based honor system, though a Treasury Inspector General report from 2018 estimated nearly $1.7 billion in annual tips still went unreported.
Individual income tax cuts from the GOP overhaul of 2017 are set to expire at the end of 2025, so Congress and the White House are likely to draft a major deal on tax policy.
It could serve as the ideal vehicle for the plan to end taxes on tips. Tax policy isn’t typically changed through standalone bills.
Dealmakers will have to consider whether “no tax on tips” is more important than other provisions when it is time to pay for their policies or allow deficits to grow.
Mr. Boucher said he was skeptical of the candidates’ plans to erase 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?”
• Tom Howell Jr. can be reached at thowell@washingtontimes.com.
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