WASHINGTON (AP) — Former President Donald Trump’s up-to-date proposal to exempt tips from federal taxes has drawn sturdy criticism from some Republican lawmakers, but significant questions remain about the impact of the measure and how it would work.
What is certain is that a change in the way tips are taxed would affect millions of people. The U.S. Bureau of Labor Statistics estimates that there are 2.24 million waiters and waitresses nationwide for whom tips make up a huge percentage of their income.
A look at Trump’s proposals and the potential political and economic implications:
TRUMP’S ELECTION YEAR PITCH IN NEVADA
Trump announced his plan for tax-free tips at a June 9 rally in Nevada, a key swing state where six electoral votes matter in the race for the White House. President Joe Biden won the state in 2020, but the Trump campaign hopes to put the state in play in the fall.
Nevada has the highest concentration of tipped workers, with about 25.8 waiters and waitresses per 1,000 jobs, followed by Hawaii and Florida.
“The hotel workers and people who get tips are going to be happy because when I get into office, we’re not going to tax tips,” Trump said at the rally. “… We’re going to do that right now, right at the beginning of my term.”
The argument creates a piercing political divide between Democrats and Republicans. While Trump believes a tax cut would assist workers, Democrats generally favor efforts to raise hourly wages—and it’s an open question which approach will resonate 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 ploy.
“Tip earners definitely need help, but Nevada workers are smart enough to distinguish between real solutions and wild campaign promises from a convicted felon,” Ted Pappageorge, secretary-treasurer of the Culinary Union, said in a statement.
Lael Brainard, director of the White House National Economic Council, declined to comment on the idea floated by Trump because, as a federal employee, she is not allowed to discuss campaign politics.
“What I can say is that President Biden has fought for real solutions that actually meet workers’ legitimate need for fair wages, and in a much more effective way, in our view,” she said, adding that tipped workers in Nevada would receive a $6,000 income raise from a higher minimum wage and the elimination of the tipped minimum wage.
HOW WOULD THE TAX EXEMPTION WORK?
Trump has not specified whether he wants to exempt tips only from income tax or also from payroll tax. Payroll taxes fund Medicare and Social Security.
For employees, a blanket exemption would mean higher net income. And for the federal government, it could mean higher budget deficits.
The Committee for a Responsible Federal Budget, a bipartisan fiscal watchdog group, has estimated that exempting tips from income and payroll taxes would reduce federal revenues by $150 billion to $250 billion over the next decade.
The committee said that exempting tips from taxation would encourage employers and employees to reclassify wages as tips when possible. The more often this happens, the more budget deficits would grow. A 10% raise in tips would raise the committee’s forecast of lost federal revenue over the next decade to $165 billion to $275 billion.
Congress will no doubt consider Trump’s tipping proposal as it considers which parts of the Tax Cuts and Jobs Act of 2017, including the lower individual tax rates, should be allowed to expire after next year. Lawmakers are already preparing for that task, though Trump’s proposal is something many hadn’t considered until recently.
Florida Republican Rep. Vern Buchanan, a ranking member of the House Budget Committee, said lawmakers need to consider the total cost of the tipping proposal and how it would be funded.
“I want to be sensitive because they work hard, you can’t find enough waiters and a big part of their income is obviously tips,” Buchanan said. “All these programs sound good. Everyone would like to pay less taxes, but we have to pay the bills.”
“I know he’s trying to make sure that people on that income get as much relief as possible. Maybe we could do the same thing by making his tax cuts more permanent and targeting them more at low-income people,” said Republican Rep. Kevin Hern of Oklahoma, who also sits on the House Tax Policy Committee.
Compromises on non-taxation of tips
Like many tax proposals, Trump’s push to exempt 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, argues that Trump’s proposal could actually backfire for many tipped workers.
For example, some customers might respond to tax-free tips by reducing their tips. Second, it could sap the momentum of efforts in some states to gradually raise the minimum wage for tipped workers so that their base pay is equal to the minimum wage for other workers.
“The lure of tax-free income could deter many workers from switching from tips to wages,” Gleckman wrote in a blog post.
Gleckman also questioned why a service worker should not pay taxes on tips while a warehouse worker earns the same amount. He noted that while Trump has promised to immediately repeal the tip tax, only Congress can repeal federal taxes, and “for the sake of efficiency, fairness and sound tax administration, we hope he doesn’t do that.”
LOOKING AHEAD
Democrats largely dismiss Trump’s proposal as a mere ploy to win votes.
Senator Debbie Stabenow, a ranking member of the Senate Finance Committee, mentioned that she worked as a waitress in college and called it “really hard work.” She supports raising the minimum wage for tipped workers to bring it in line with the minimum wage for other workers.
“In my opinion (Trump’s) proposal is not serious and I don’t think it goes far enough to accommodate low-income earners,” Stabenow said.
Senator Ron Wyden, chairman of the Senate Finance Committee, said Trump would “discard many ideas in the course of his work,” but his record as president shows that he has placed an emphasis on tax breaks for the wealthy and corporations.
“All these things he throws away every day, I won’t believe it until 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 rallies and meetings, and last week he raised his proposal at a meeting with Republican lawmakers and business leaders in Washington.
“I think this is actually a very smart idea. The men and women who rely on tips for their income work their asses off,” said Senator Ron Johnson (R-Wisconsin). “This is a very good, targeted tax reform.”
Some lawmakers and allies have begun tweeting photos of their restaurant bills with handwritten messages promoting Trump’s promises. Republican Rep. Derrick Van Orden of Wisconsin wrote “Vote Trump!” and “No tax on tips!” on his bill from a Milwaukee restaurant.
Musician Kid Rock, a prominent Trump supporter, shared a photo on X.
“A vote for Trump is a vote against the tip tax!!,” he wrote on his receipt. According to the photo, he tipped $400 on a $1,143 bill at an high-priced steakhouse.
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Associated Press writer Jonathan J. Cooper in Phoenix contributed to this report.
