WASHINGTON — Former President Donald Trump’s new proposal to exclude tips from federal taxes is receiving positive feedback from some Republican lawmakers, but there are still significant questions about the potential impact of the policy and how it would be implemented.
It is clear that a change in the taxation of tips would have an impact on millions. The U.S. Bureau of Labor Statistics estimates that there are 2.24 million waiters and waitresses nationwide, with tips constituting a significant portion of their income.
Here is an overview of what Trump is proposing and the potential political and economic implications:
Trump’s announcement in Nevada
Trump unveiled his tax-free-tips plan at a rally in Nevada on June 9, a crucial battleground state with six electoral votes in the presidential race. Although President Joe Biden won the state in 2020, the Trump campaign is hoping to make Nevada competitive in the upcoming election.
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Nevada has the highest concentration of tipped workers in the country, with approximately 25.8 waiters and waitresses per 1,000 jobs, followed by Hawaii and Florida.
“To those hotel workers and people who receive tips, you will be very pleased, because when I take office, we will not tax tips, for those who earn tips,” Trump declared at the rally. “… We will implement this immediately, as a first order of business.”
The proposal sets up a stark political contrast between Democrats and Republicans. While Trump believes that a tax cut would benefit workers, Democrats generally support initiatives to raise hourly wages — and it remains uncertain which approach resonates more with voters.
The Culinary Union, which represents 60,000 workers in Las Vegas and Reno and supports Biden, dismissed Trump’s plan as a political stunt.
“Relief is certainly needed for tip earners, but Nevada workers are discerning enough to distinguish between real solutions and extravagant campaign promises from a convicted felon,” said Culinary Union Secretary-Treasurer Ted Pappageorge in a statement.
Lael Brainard, director of the White House National Economic Council, refrained from commenting on Trump’s suggestion as a federal employee, as she is not permitted to engage in campaign politics.
“What I can say is that President Biden has advocated for genuine solutions that effectively address the legitimate need of workers for fair wages,” she stated, highlighting that tipped workers in Nevada would benefit from a $6,000 income increase from a higher minimum wage and the elimination of the tipped minimum wage.
How would the tax exemption operate?
Trump has not specified whether he intends to exempt tips from just income taxes or also from payroll taxes. The payroll tax funds Medicare and Social Security.
For workers, a universal exemption would mean higher take-home pay. However, for the federal government, this could result in larger budget deficits.
The Committee for a Responsible Federal Budget, a nonpartisan fiscal watchdog group, estimated that excluding tips from both income and payroll taxes would reduce federal revenues by $150 billion to $250 billion over the next decade.
The committee also indicated that exempting tips from taxation could lead employers and workers to reclassify wages as tips where feasible, further exacerbating federal budget deficits. For instance, a 10% increase in tips could raise the committee’s projection for lost federal revenue to a range of $165 billion to $275 billion over the next decade.
Congress would undoubtedly scrutinize Trump’s proposal on tips as it evaluates which provisions of the 2017 Tax Cuts and Jobs Act will expire after next year, including the lower individual tax rates. Lawmakers are already preparing for the task, though Trump’s proposal is something that many had not previously considered.
Rep. Vern Buchanan, R-Fla., a senior House Ways and Means Committee member, stated that lawmakers would have to carefully weigh the overall cost of the tips proposal and how to finance it.
“I want to be mindful because they work hard, there are not enough waiters available, and a significant portion of their earnings comes from tips,” Buchanan remarked. “All these programs sound appealing. Everyone would like to pay lower taxes, but we have financial obligations.”
“I know he’s trying to ensure that people at that income level have as much relief as possible. We may be able to accomplish the same goal by making his tax cuts more permanent and addressing lower-income individuals more effectively,” added Rep. Kevin Hern, R-Okla., who also serves on the Ways and Means Committee overseeing tax policy.
Tradeoffs of tax-free tips
Similar to many tax proposals, Trump’s push to exempt tips could have unintended repercussions.
Howard Gleckman, a senior fellow at the Tax Policy Center, argues that Trump’s proposal could potentially backfire for many tipped workers.
For instance, some customers might reduce their gratuity in response to tax-free tips. It could also hinder efforts in some states to gradually raise the minimum wage for tipped workers so that their base pay aligns with the minimum wage for other workers.
“The attraction of tax-free income could result in many workers opposing the shift from tips to wages,” Gleckman noted in a blog post.
Gleckman also questioned why a service worker should be exempt from paying taxes on tips compared to a warehouse worker earning the same amount. He emphasized that while Trump pledged to repeal the tax on tips immediately, only Congress has the authority to repeal federal taxes, and “for reasons of efficiency, equity, and sound tax administration, let’s hope it doesn’t happen.”
Democrats have largely dismissed Trump’s proposal as a tactic to win over voters.
Sen. Debbie Stabenow, a senior member of the Senate Finance Committee, who previously worked as a waitress, described it as “really hard work.” She favors increasing 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 low-wage working people,” Stabenow expressed.
Sen. Ron Wyden, the chairman of the Senate Finance Committee, remarked that Trump was “throwing out lots of ideas as he goes,” but his presidency was marked by a focus 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 remarked.
However, Trump’s enthusiasm for the idea appears to be growing. The tax promise has become a frequent topic at his rallies and meetings, and he raised the proposal during a gathering with GOP lawmakers and business leaders in Washington last week.
“I think it’s actually a very smart idea. The men and women who rely on tips for their earnings are working very hard,” stated Sen. Ron Johnson, R-Wis. “That’s very good, targeted tax reform right there.”
Some lawmakers and allies have started sharing photos of their restaurant bills with handwritten messages to spread awareness about Trump’s promise. Rep. Derrick Van Orden, R-Wis., wrote “Vote Trump!” and “No Tax on tips!” on his bill from a Milwaukee restaurant.
The musician Kid Rock, a prominent Trump supporter, shared a photo on X.
“A vote for Trump is a vote for no tax on tips!!” he wrote on his receipt. He tipped $400 on a $1,143 bill at a high-end steakhouse, as shown in the photo.