As the presidential campaign intensifies, both former President Donald Trump and Vice President Kamala Harris are vying for the support of service and hospitality workers by proposing to eliminate taxes on tips. However, experts suggest that this move may not benefit many tipped workers, as a significant portion of them do not earn enough to owe federal income taxes.
Both Trump and Harris have put forth this idea without releasing detailed proposals, which would require approval from Congress. Key considerations include the extent to which tipped income would be tax-free, measures to prevent fraud and abuse, and whether both federal income and payroll taxes would be waived.
Harris plans to link the elimination of tip taxes with a call for Congress to raise the minimum wage, along with imposing income limits and preventing certain professionals from exploiting the policy. On the other hand, Trump's proposal was followed by a bill introduced by Republican Senator Ted Cruz, which allows workers to deduct tips from federal income taxes but does not eliminate payroll taxes.
Approximately 4 million individuals were employed in tipped occupations in 2023, comprising about 2.5% of the workforce. These workers include waiters, bartenders, drivers, and hairdressers, among others. Tipped workers typically earn lower wages compared to non-tipped workers, with many falling below the threshold for federal income tax liability.
While the idea of ending taxes on tips may seem appealing, critics argue that it could be complex and inequitable, benefiting only a small fraction of workers. Concerns also arise regarding potential reactions from employers and customers, such as adjustments in wages and tipping practices.
The Culinary Workers Union Local 226 in Nevada has expressed support for eliminating tip taxes and raising the federal minimum wage. However, the impact on the federal budget deficit remains a point of contention, with estimates suggesting a significant revenue loss over a decade if tip taxes are abolished.
