‘No tax on tips’ plans from Trump, Harris won’t do much for many tipped workers

Eliminating federal taxes on tips has suddenly emerged as just about the only idea that former president Donald Trump and Vice President Kamala Harris agree on—but experts say the proposal wouldn’t do much to help workers’ pocketbooks.

The idea emerged almost out of nowhere in June, when Trump announced at a Nevada rally that he supported a local waitress’s suggestion that workers shouldn’t pay taxes on tips. Under current law, tips are treated the same as regular wages are for tax purposes.

Harris at a Nevada rally Saturday echoed the idea for service and hospitality workers.

The tax cut could be politically potent in the Silver State, where more than 300,000 people work in the leisure and hospitality sector in the Las Vegas metro area, by far the largest employer by industry, according to federal data. Average hourly earnings statewide in those jobs are lower than they are nationally and in other industries in Nevada.

Since Trump brought the proposal to the forefront, it’s caught on. Senate Republicans introduced a bill to codify it, and Nevada’s two Democratic senators swiftly backed it, too. Trump campaign advisers and GOP lawmakers felt they had Democrats cornered, forcing them to embrace the tax cut or risk alienating legions of service workers.

Now Harris is on board, as well, and Democratic strategists say that might blunt Trump’s advantage. Her move also helped her maintain the support of Las Vegas’s mighty service sector unions, in particular the Culinary Workers Union, which represents 60,000 people in Las Vegas and Reno, and could help determine who wins the state in November’s election.

The only problem? Many economists say the plan is unlikely to have much practical impact—even though it could cost the government at least $10 billion to $15 billion each year in tax revenue, according to the nonpartisan Committee for a Responsible Federal Budget, or CRFB.

The change wouldn’t help most low-income Americans. Tipped workers—including hairdressers, bartenders and restaurant servers—represent less than 3 out of every 100 workers in America, according to an analysis by Yale’s Budget Lab. Even among low-wage workers in the bottom quarter of wage earners, just 5 percent earn tips. Tipped workers are far more likely to be teenagers and young adults under 25.

“I don’t know of an analyst on either the left or the right who thinks that this is actually a good idea,” said Howard Gleckman, a senior fellow at the Tax Policy Center who is among the many experts suddenly turning their attention to how tips are taxed. “There’s no real economic argument for it.”

He added: “If you’re a warehouse worker making the same amount of money as a restaurant server, why should you pay more in taxes on your income?”

The Yale analysis found that at least 37 percent of tipped workers already don’t pay any federal income tax because they don’t earn enough each year, so they wouldn’t be helped by being exempted from some income taxes.

And the policy might actually end up hurting those workers, some economists said: Some tipped workers might no longer qualify for the earned income tax credit, which helps low-income families tremendously, or get credit toward eventual Social Security benefits from tips. (While Harris specified that workers would still owe payroll taxes under her plan, Trump has not clarified whether his goal is to exempt tips from payroll taxes for Social Security and Medicare, as well as from income taxes.)

But Trump’s advisers say the idea has a few advantages. First, tips are burdensome to report on tax returns, Stephen Moore, an economist at the right-wing Heritage Foundation and a Trump economic adviser, said. Tips are broadly underreported to the Internal Revenue Service already.

Second, Trump’s team says workers would be better off holding on to whatever they pay in taxes on tips and putting them back into the economy through spending.

And third: well, votes.

“We view it as both a good economic policy and a big political winner with blue-collar workers,” Moore said. “We think it’s a great way to get the votes of the waitresses and busboys and the car valets and the caddies.”

White House press secretary Karine Jean-Pierre said Monday that President Joe Biden would “absolutely” sign legislation ending taxes on tips.

For Harris, backing the idea allows her to continue outreach to working-class voters and discuss the “tax fairness” issues she and Biden have stumped on. Harris’s campaign told The Washington Post that she would limit the exemption for tips to certain industries and to workers below a certain income threshold.

Congress is likely to write new tax legislation next year, when much of the 2017 tax cuts that Trump signed into law will expire. Harris wants to let the cuts expire for the wealthiest individuals and big corporations. Trump, in contrast, wants to keep all the tax cuts and lower the corporate rate even more.

Moore and anti-tax crusader Grover Norquist both told The Post they expect a Republican bill would also apply only to certain sectors, though the legislation currently in the Senate includes no such restrictions.

Harris’s campaign did not comment on the record for this report.

Trump campaign communications director Steven Cheung in a statement called the vice president “Copy Cat Kamala,” and said she was a “dishonest, fraudulent failure.” Cheung called for Harris to give a media interview and “answer questions about why she stole President Trump’s No Tax on Tips proposal.”

Taxes on tips have a fairly small impact on the federal budget. In 2018, the last year for which data is available, more than 6 million workers paid taxes on $38 billion of tips, an average of more than $6,000 in earnings per worker who reported their tips.

Still, analysts at the CRFB estimated that Trump’s proposal would cost the federal government at least $150 billion over the course of a decade, and that Harris’s potentially more modest proposal would cost at least $100 billion.

It could cost more, too—by supercharging tipping.

If tips aren’t taxed, employers and workers might share a strong incentive to shift more compensation from regular wages to tips, meaning the way the law is written would be hugely important. Lawmakers would need to stop highly paid professionals from reclassifying part of their salary as a tip, or stop a store from selling an item for a nominal cost plus a generous tip.

“There are very few guardrails here,” Brendan Duke, who works on economic policy at the liberal-leaning Center for American Progress, said of the version of the policy recently proposed by Senate Republicans. “That’s a real incentive to recharacterize income.”

If the amount of income classified as tips were to double under the new law, it could cost as much as $500 billion under Trump’s proposal or $325 billion under Harris’s, said CRFB senior vice president Marc Goldwein.

Even though Nevada’s powerful hospitality workers union loves the idea, some leading labor advocates have criticized the proposal, saying other policies could better ease restaurant workers’ financial hardship. Saru Jayaraman, president of One Fair Wage, a national labor organization that has advocated to change the laws that allow employers to pay workers well below the standard minimum wage if they receive tips, said in a statement that both Harris and Trump’s proposals are “merely a superficial attempt to address the affordability crisis faced by service workers.”

Response from service industry workers has been mixed.

“It would fantastic if my tips weren’t taxed. Tremendous,” said Amy Burke, who has worked as a bartender in New Orleans for the past 29 years. “It would have a huge impact on my take home pay. But every single politician says things to get into office, and then whoever gets into office does whatever they want.”

Katie Giede, a server at Waffle House in Conyers, Georgia., said eliminating taxes on tips would be “helpful” but also wished policymakers would focus on bigger issues. Giede, 32, makes $2.92 an hour plus tips. After deductions, her paycheck is “nothing,” Giede said, and some nights, she has to decide whether she and her 5-year-old son skip dinner or eat something that lacks basic nutrition.

“Even if taxes were taken off tips, most servers and I wouldn’t come close to what it takes to live comfortably without 4 or 5 jobs,” Giede said. “Resources should be used to figure out how to get companies to pay our wages instead of customers paying our wages [with tips].”