Jane Sheppard reporting: Former President Donald Trump recently proposed a controversial tax plan, aimed at excluding tips from federal taxes. While the proposal has been well-received by some Republican lawmakers, it has raised questions about its potential impact and implementation process.
The U.S. Bureau of Labor Statistics estimates that there are approximately 2.24 million waiters and waitresses across the country, with tips forming a significant portion of their income. As such, a change in the taxation of tips could have massive implications.
Trump’s Election Year Strategy in Nevada
Trump unveiled his tax-free-tips plan at a rally in Nevada on June 9. This battleground state has six electoral votes up for grabs in the race for the White House. Notably, President Joe Biden won the state in the 2020 elections, but Trump’s campaign hopes to turn the tide this fall.
Nevada boasts the highest concentration of tipped workers in the country, with about 25.8 waiters and waitresses per 1,000 jobs. Hawaii and Florida closely follow.
Trump stated at the rally, “To those hotel workers and people who get tips, you are going to be very happy, because when I get to office we are going to not charge taxes on tips, people making tips.” He further promised that this would be one of his initial undertakings in office.
The proposed tax cut sets up a stark political contrast. While Trump believes that a tax cut would benefit workers, Democrats have long championed efforts to increase hourly wages. The effectiveness of these contrasting approaches with voters remains to be seen.
The Proposed Tax Exemption: How Would it Work?
Trump has not yet clarified whether he intends to exempt tips from just income taxes or from the payroll tax as well. The latter funds Social Security and Medicare.
A blanket exemption would result in more take-home pay for workers. However, it could also lead to larger budget deficits for the federal government. The nonpartisan fiscal watchdog group, 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.
Furthermore, the committee posits that exempting tips from taxation would encourage employers and workers to reclassify wages as tips where possible. This would further increase federal deficits. For instance, a 10% increase in tips would hike up the committee’s projection for lost federal revenue to a range of $165 billion to $275 billion over the next decade.
Potential Trade-offs of Not Taxing Tips
Trump’s proposal could have unintended consequences. Howard Gleckman, a senior fellow at the Tax Policy Center, argues that the proposal could backfire for many tipped workers. For instance, customers might reduce their gratuity in response to tax-free tips. Additionally, the proposal could derail efforts in some states to gradually increase the minimum wage for tipped workers.
Looking Forward
Democrats have largely dismissed Trump’s proposal as a campaign stunt. However, Trump’s enthusiasm for the idea seems to be growing. He has made the tax promise a fixture of his rallies and meetings. Furthermore, he discussed his proposal during a recent meeting with GOP lawmakers and business leaders in Washington.
“I think it’s actually a very smart idea. The men and women who rely on tips for their earnings, they are working their tails off,” said Sen. Ron Johnson, R-Wis. “That’s very good, targeted tax reform right there.”
In support of Trump’s promise, some lawmakers and allies have started sharing photos of their restaurant bills with handwritten messages. For instance, Rep. Derrick Van Orden, R-Wis, wrote “Vote Trump!” and “No Tax on tips!” on his bill from a Milwaukee restaurant.
Even musician and prominent Trump supporter, Kid Rock, shared a photo with the caption, “A vote for Trump is a vote for no tax on tips!!” He reportedly tipped $400 on a $1,143 bill at a high-end steakhouse.
