Trump floats plan to end taxes on tips, though experts raise doubts

WASHINGTON — Economists across the ideological spectrum raised doubts about the cost and workability of former President Donald Trump’s proposal over the weekend to exempt tips from federal taxes if he wins in November.

During a campaign rally Sunday in Las Vegas, where hundreds of thousands work in the hospitality industry, Trump promised service workers that they would no longer have to pay federal taxes on tipped income if the presumptive Republican nominee wins a second term.

The roughly 6 million tipped workers in the U.S., as of the latest data available from 2018, make up a small fraction of the country’s 150 million taxpayers, but campaigning on tax cuts for certain demographics is increasingly a top issue leading up to November’s presidential election.

“This is the first time I’ve said this, and for those who work at hotels and people that get tips, you’re gonna be very happy because when I get to office we are going to not charge taxes on tips, on people making tips,” Trump said to cheers at the rally.

Trump said he will “do that right away, first thing in office,” though changing the tax code would require an act of Congress.

Tax code due for update

Large portions of the sweeping 2017 tax law that Congress passed along party lines during the Trump administration are set to expire at the end of 2025, and lawmakers and advocates are already trotting out their priorities.

Tipped workers made an average $6,000 on top of their base wages in 2018, and together they paid about $38 billion in taxes on tips, according to the latest Internal Revenue Service figures. In 2018, the IRS collected about $7 trillion in overall taxes.

“In terms of the macroeconomic impact, it’s pretty small,” said Erica York, senior economist and research director at the right-leaning Tax Foundation.

“If you think of it in terms of what Congress is going to be debating next year, one of the big challenges that lawmakers are going to face is the revenue impact. Every dollar of tax revenue for one type of tax cut is $1 less for another type of tax cut. So it’s going to be a real exercise in prioritizing trade-offs across different policies,” York said.

Trump has vowed to extend all tax cuts enacted under his watch, but the cost of extending them over the next decade would reach $4.6 trillion, according to estimates from the Joint Committee on Taxation and nonpartisan Congressional Budget Office.

Trump’s proposal to tipped workers “smells more of campaign politics than a really well thought out and principled tax policy proposal,” York added. “And I think the elephant in the room for both candidates is that they haven’t fully addressed ‘what are you going to do about these huge expirations that are scheduled to happen next year?’”

The Trump campaign did not respond to requests for further detail.

Incentivizing tipped work

Andrew Lautz, associate director for the Bipartisan Policy Center, said while tipped workers are a “small slice” of the tax base, “you’re talking about a potentially large chunk of revenue that you’re giving up on an annual basis,” depending on how the policy would be rolled out.

“Our current tax system is certainly not designed to treat all income equally, but this proposal, if it were enacted into law, would sort of add a new category of income that is not subject to tax,” Lautz said. “And you know what economic theory would say is that, all else equal, making that change would incentivize people to have tips which are not taxed under this proposal versus regular wage income.”

There is also the potential for “misuse,” he added.

“If Donald Trump is president again next year, and even if he’s not, but this proposal sort of catches interest from policymakers in Congress, it’s very well possible that this could be on the table,” Lautz added.

Janet Holtzblatt, senior fellow at the left-leaning Tax Policy Center run by the Urban Institute and Brookings Institution, said Trump’s proposal to eliminate taxes on tips is “unusual.”

“Because tips are a substitute for the wages and salaries that the rest of us get, and if you don’t tax tips, you’re basically not taxing tip workers (on) their wages, making it a tax advantage on their earnings. Those of us who don’t work in industries where tips are paid, we would not get the same tax advantage,” Holtzblatt said.

Minimum wage

Several localities’ wage laws allow employers to pay service workers hourly rates well below the federal minimum wage.

Holtzblatt said the “solution” is for localities to raise the minimum wage for service workers for multiple reasons.

“Tips are not always a predictable form of income,” she said. “And there’s a great deal of variation, the tips that the server gets at the top-notch restaurant are going to be very different than the tips the person in the diner gets.”

President Joe Biden’s reelection campaign responded to Trump’s “wild campaign promise” by saying that Biden supports increasing the minimum wage and eliminating the tipped minimum wage, “a much bigger deal” than Trump’s proposal, a campaign spokesman wrote in a Monday email to States Newsroom.

Ted Pappageorge, secretary-treasurer for Culinary Workers Union Local 226, which has 60,000 members in Las Vegas and Reno, Nevada, said the organization has for decades “fought for tipped workers’ rights and against unfair taxation.”

“Relief is definitely needed for tip earners,” Pappageorge said in a statement over the weekend. “But Nevada workers are smart enough to know the difference between real solutions and wild campaign promises from a convicted felon.”