Former President Donald Trump’s new proposal to exempt federal tax tips is getting strong reviews from some Republican lawmakers, although big questions remain about the policy’s impact and how it will work.
What is certain is that the change in tip tax will affect millions. The US Bureau of Labor Statistics estimates that there are 2.24 million waiters and waitresses across the country, with tips making up a large portion of their income.
A look at what Trump is proposing and the potential political and economic consequences:
Trump’s election-year platform in Nevada
Trump announced his tax-free tips plan at a June 9 rally in Nevada, a key six-electoral battleground in the race for the White House. President Joe Biden won the state in 2020, but the Trump campaign is hoping to take the state into play this fall.
Nevada has the highest number of job vacancies in the country, with 25.8 job vacancies per 1,000 jobs, followed by Hawaii and Florida.
“To those hotel workers and people who get tips, you’re going to be very happy, because when I get into office we’re not going to tax tips, people who make tips,” Trump said at the rally. “… We’ll do that right away, first thing in the office.”
The platform sets a sharp political divide between Democrats and Republicans. While Trump thinks the tax cuts will help workers, Democrats have allowed efforts to raise hourly wages — again an open question that resonates with voters.
The Culinary Union, which represents 60,000 workers in Las Vegas and Reno and supports Biden, dismissed Trump’s plan as lacking.
“Help is definitely needed for tipsters, but Nevada workers are smart enough to know the difference between real solutions and wild campaign promises from a convicted felon.” Secretary of the Culinary Union-Ted Pappageorge said in a statement.
Lael Brainard, director of the White House National Economic Council, declined to comment on the opinion filed by Trump because, as a government employee, he should not discuss campaign politics.
“What I can say is that President Biden has fought for real solutions that address the legitimate demand of workers for fair wages, we think, very effectively,” he said, adding that Nevada workers will receive a $6,000 pay raise. a higher minimum wage and the abolition of the requested minimum wage.
How will the tax exemption work?
Trump did not specify whether he wants to exempt tips from just the income tax or the payroll tax. The payroll tax funds Medicare and Social Security.
For employees, blanket exemptions can mean more take-home pay. And for the federal government, it could mean a bigger budget deficit.
The Committee for a Responsible Federal Budget, a nonpartisan fiscal watchdog group, has estimated that exempting tips from both income and payroll taxes would reduce federal revenue by $150 billion to $250 billion over the next decade.
The committee said the exemption of tips from taxation would also result in employers and employees reclassifying wages as tips where possible. If that happens, then the deficit of the organization will increase. A 10% tip increase, for example, would increase the committee’s estimate of lost federal revenue to a range of $165 billion to $275 billion over the next decade.
Congress will undoubtedly examine Trump’s proposal for tips as it considers which parts of the 2017 Tax Cuts and Jobs Act are allowed to expire after next year, including lower tax rates. Lawmakers are gearing up for the job, even though Trump’s proposal is something many had not considered until recently.
Rep. Vern Buchanan, R-Fla., a senior member of the House Ways and Means Committee, said lawmakers will have to consider the full cost of the tip proposal and how to pay for it.
“I want to sympathize because they work hard, you won’t get enough of them, and it’s obvious that a large part of their income is from tactics,” said Buchanan. “All these plans sound good. Everyone would like to pay less tax, but we have to pay the bills.”
“I know you’re trying to make sure that people at that salary level get as much relief as possible. We can do the same thing in making his tax cuts permanent and possible to deal with low income people,” said Rep. Kevin Hern, R-Okla., who also serves on the Ways and Means Committee, powers over tax policy.
Exchange of tax-free tips
Like many tax proposals, Trump’s push to eliminate tips could have unintended consequences.
Howard Gleckman, a senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, says Trump’s proposal could set back many trusted workers.
For example, some customers may respond to tax-free tips by reducing their payouts. Second, it could derail efforts by some states to gradually raise the minimum wage for employed workers so that their basic wage is in line with the minimum wage for other workers.
“The lure of tax-free income can make many workers resist moving from wealth to wages,” Gleckman wrote in a blog post.
Gleckman also questioned why a service worker should avoid paying taxes on tips rather than a warehouse worker receiving the same amount. He noted that while Trump has promised to eliminate the tip tax immediately, only Congress can repeal federal taxes, and “for reasons of efficiency, fairness, and sound tax administration, let’s hope not.”
Looking ahead
Democrats have largely dismissed Trump’s proposal as a ploy to win over voters.
Sen. Debbie Stabenow, a senior member of the Senate Finance Committee, noted that she was a waitress in college, calling it “really hard work.” He prefers to raise the minimum wage for ticked 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-income people,” Stabenow said.
Sen. Ron Wyden, chairman of the Senate Finance Committee, said Trump is “making a lot of ideas as he goes along,” but his record as president shows an emphasis on tax breaks for the wealthy and corporations.
“All these things he throws away every day, I’ll believe it when I see it,” Wyden said.
But Trump’s enthusiasm for the idea appears to be growing. The tax pledge has since become a staple of Trump’s meetings and rallies, and he floated his proposal while meeting with GOP lawmakers and business leaders in Washington last week.
“I think it’s actually a very smart idea. “Men and women who rely on tips to get their income, are working their tails off,” said Sen. Ron Johnson, R-Wis. “That’s great, targeted tax reform right there.”
Some lawmakers and allies have begun tweeting pictures of their restaurant bills with handwritten messages designed to spread the word about Trump’s promise. Rep. Derrick Van Orden, R-Wis., wrote “Vote Trump!” and “No tax on tips!” to his credit for a Milwaukee restaurant.
Singer Kid Rock, a prominent Trump supporter, shared the photo on X.
“A vote for Trump is a vote for no tax on tips!!” he wrote on his receipt. He cashed out $400 from a $1,143 bill in the most expensive area, according to the photo.
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