“WITH TRUMP, NO TAXES ON TIPS!!!” declared former President Donald Trump in a Saturday Truth Social post. Is this proposal really possible? Let’s check it out.
Trump, the presumptive GOP candidate for the 2024 presidential election, has mentioned this proposal before.
“I am the only Candidate who has ever called for delivering relief to our wonderful Service Workers by NOT TAXING THEIR TIPS,” he said in a June 9 post. “It was my idea that Tips should not be taxed, and only I will GET IT DONE - And do it IMMEDIATELY upon my return to the White House.”
As of 2015, there were an estimated 4.3 million tipped workers in the U.S. and their wages had not increased in 16 years, per the National Employment Law Project. According to the U.S. Department of Labor, tipped workers regularly receive more than $30 each month in tips and therefore employers must only pay them $2.13 per hour, a fraction of the regular minimum wage. Nearly thwo-thrids of tipped workers in the U.S. are women.
Even though tipped workers are supposed to net $15, by law “too many employers don’t follow the law, say advocates of abolishing the subminimum,” per BU Today.
Sean Jung, an assistant professor of hospitality analytics at the Boston University School of Hospitality Administration, said that raising the minimum wage for tipped workers wouldn’t necessarily eliminate the need for tipping. He explained that tipping is seen as ethical in American culture. The tipping model is also built in to the operations and expectations of many service-related businesses, for both operators and consumers.
This year, customer tips still provide the “lion’s share” of wages to tipped workers, said an analysis from the Center for Economic Policy Research. At the same time, an increase in tipping “nudges” for workers who are paid minimum wage or higher has made things confusing for consumers.
Trump’s proposal – described by Axios as an appeal to working-class voters frustrated by high inflation – might seem like a welcome relief for tipped workers, who also experienced stress when their workplaces were shuttered temporarily (or sometimes permanently) during the COVID-19 pandemic. But is it too good to be true?
Reasons why it might work
“Plenty of prominent voices within the GOP have hailed the concept,” said The Hill. “A desire to show fealty to Trump in an election year is part of that picture, but the enthusiasm seems to also be driven by a belief that the proposal could help undercut Democratic attacks on Republicans as the party of the rich.”
Sam Brown, who recently clinched a Republican nomination to run against incumbent Democratic Sen. Jacky Rosen (D-Nev.) even told NBC News that the idea was his first.
“That was actually a policy idea that my team had sort of developed and we were planning to roll out in the general election,” Brown said. “So in some sense, President Trump scooped us and beat us to it. But that’s something we’re fully behind. Those tips are not guaranteed income, people work hard for it.”
U.S. Sen. Ted Cruz (R-Texas) introduced legislation Thursday to exempt tips from being subject to taxation under the federal income tax called the No Tax on Tips Act. It was co-sponsored by Sens. Steve Daines (R-Mont.), Rick Scott (R-Fla.), and Sen. Cramer (R-N.D.).
A press release from Cruz said it also “has the support of industry groups including the National Restaurant Association.”
Forbes noted that “Trump’s proposed tip income tax exemption has since drawn praise from the public, candidates, and incumbent lawmakers,” at a time when there is a concern about labor shortages in tip heavy industries such as hospitality and travel.
According to the outlet, Democrats haven’t totally rejected the idea. However, some progressives have expressed skepticism.
Ryan Ellis, who has run a tax preparation business for more than two decades and is president of the Center for a Free Economy, told Forbes that Trump’s proposal could actually improve compliance with tip reporting and therefore provide other types of tax revenue.
“More tips legally reported means a bigger tax base for Social Security and Medicare payroll taxes, as well as state unemployment tax. This would serve as a partial offset to the federal income tax benefit,” he explained. According to Forbes, the “Internal Revenue Service claims 45% of taxable tip income goes unreported, whereas only 1% of wage income is unreported.”
Reasons why it might not work
In addition to progressives, financial experts and fiscal conservatives also seem skeptical of the idea, said The Hill. For those in Trump’s own party, there are concerns that it would expand the national deficit. Other concerns are related to how the exemption would work.
According to the Committee for a Responsible Budget, exempting all tip income from federal income and payroll taxes would reduce federal revenues by $150 to $250 billion over the next decade. By comparison, Trump’s proposal to lower corporate taxes from 21% to 20% would cost an estimated $130 billion over a decade.
Trump hasn’t said how he plans to replace this lost revenue, but Axios said he only has two clear options. One would be to increase taxes on someone else or to add on to the federal deficit.
Axios likened Trump’s proposal to a Las Vegas casino bet – and said it is something that would never fly on the Vegas strip.
“It has multiple potential payouts and it's being made, essentially, with house money,” said the outlet.
Although Trump first mentioned the plan during a rally in Nevada, the state’s Culinary Workers Union has brushed off the proposal.
“Nevada workers are smart enough to know the difference between real solutions and wild campaign promises from a convicted felon,” said Ted Pappageorge, the unions secretary-treasurer, according to the Nevada Current.
In an opinion piece for MSNBC, Sharon Block, Executive director of the Center for Labor and a Just Economy also argued that Trump’s proposal would do little to put more money in tipped workers’ pockets,” since “many tipped workers make too little to owe much or any federal taxes.”
“There is a separate concern, too,” said The Hill. “If the tax system were to be shifted to incentivize tips over regular wages, it seems likely that some jobs that are currently waged would shift to a tipping model,” and “such a shift might exacerbate existing public annoyance about an apparent expansion of the services for which tipping is expected.”
What about Biden?
What does current President Joe Biden, who is set for a rematch with Trump in November, think about the proposal on tips?
Well, per Axios, he has already “raised the minimum wage for federal workers,” and called to increase it for everyone else and wants to eliminate the so-called tipped minimum wage.
When asked the proposal while briefing reporters last week, national economic adviser Lael Brainard “declined to address the idea of exempting tips from taxes specifically,” according to CBS News.
“Our view is that the meaningful set of policy changes that would really lift the living standards of Nevada workers would be to raise the minimum wage,” Brainard said.