Former President Donald Trump’s new proposal to exclude tips from federal taxes is receiving positive feedback from some Republican lawmakers, although there are still concerns about the policy’s impact and implementation.
It is clear that a change in how tips are taxed would impact millions of workers. The U.S. Bureau of Labor Statistics estimates that there are 2.24 million waiters and waitresses in the country, with tips making up a significant portion of their earnings.
Here is an overview of what Trump is proposing and the potential political and economic implications:
Trump’s announcement in Nevada
Trump unveiled his plan for tax-free tips during a rally in Nevada on June 9, a crucial battleground state with six electoral votes. Although President Joe Biden won the state in 2020, the Trump campaign aims to make it competitive in the upcoming election.
Nevada has the highest concentration of tipped workers in the nation, with approximately 25.8 waiters and waitresses per 1,000 jobs, followed by Hawaii and Florida.
During the rally, Trump promised, “To those hotel workers and individuals who receive tips, you will be pleased because we will not tax tips when I assume office… We will implement this immediately, as soon as I take office.”
This proposal highlights a stark contrast between Democrats and Republicans. While Trump believes a tax cut would benefit workers, Democrats generally support raising hourly wages. The effectiveness of these approaches with voters remains to be seen.
The Culinary Union, which represents 60,000 workers in Las Vegas and Reno and supports Biden, dismissed Trump’s plan as a mere campaign tactic.
How would the tax exemption function?
Trump has not specified if he intends to exempt tips from income taxes only or also from the payroll tax, which funds Medicare and Social Security.
For workers, a blanket exemption would result in higher take-home pay, potentially leading to larger budget deficits for the federal government.
The Committee for a Responsible Federal Budget estimates that exempting tips from both income and payroll taxes could reduce federal revenues by $150 billion to $250 billion over the next decade. Additionally, the committee warns that this exemption may lead to reclassification of wages as tips, further increasing deficits.
Congress would likely evaluate Trump’s proposal as it decides which parts of the 2017 Tax Cuts and Jobs Act to retain, including lower individual tax rates. Lawmakers are already preparing for this task, with many considering Trump’s tip proposal for the first time.
Trade-offs of not taxing tips
Similar to many tax measures, Trump’s suggestion to exempt tips could have unintended consequences.
Howard Gleckman of the Tax Policy Center argues that this proposal may backfire for many tipped workers. Customers could reduce gratuities in response to tax-free tips, and efforts to increase the minimum wage for tipped workers in some states could be hindered.
Looking to the future, Democrats largely view Trump’s proposal as a ploy to win over voters, with some emphasizing the need to raise the minimum wage for tipped workers.
Despite criticisms, Trump remains enthusiastic about the idea, with some lawmakers and supporters endorsing the proposal through social media posts and public statements.
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