Vice President Kamala Harris followed her rival contender for the White House, former President Donald Trump, and championed a proposal to eliminate federal taxes on tips at a Las Vegas campaign rally on Saturday.
It’s a popular policy stance among the tipped service workers interviewed by Atlanta Civic Circle this week, but some said it fails to address deeper problems that contribute to the cost-of-living crisis, like low wages. Meanwhile, economists and industry groups are concerned about knock-on effects and say the devil is in the details.
“It’s a great thought,” said Katie Giede, a 32-year-old Waffle House server in Conyers, who is a member of the Union of Southern Service Workers (USSW).
“To know that they are considering us … It would definitely be a start for them to take the taxes off of tips,” she said, adding that it’s “helpful, but what we really need is a livable wage to be able to meet our basic needs, such as food and doctors and parts for our cars.”
Trump’s plan is simple: no federal taxes on tips, full stop. No income tax, no payroll tax, nothing. Simply, it is to “end all taxes on tips.”
That mirrors a bill in the House proposed by Matt Gaetz (R-FL) and Thomas Massie (R-KY). A slightly different bill in the Senate, proposed by Ted Cruz (R-TX), with support from Nevada’s two Democratic Senators, Catherine Masto and Jacky Rosen, would retain payroll taxes on tips, which go to Social Security and Medicare, but eliminate the federal income tax.
Harris’s proposal isn’t fully clear, but it would also retain payroll taxes. According to a Harris campaign official, “She would work with Congress to craft a proposal that comes with an income limit and with strict requirements to prevent hedge fund managers and lawyers from structuring their compensation in ways to try to take advantage of the policy.”
Harris would also push for an increase in the minimum wage. The federal minimum wage is currently $7.25 per hour, but for tipped workers it is $2.13 per hour. However, if a tipped worker does not make at least $7.25 per hour after tips, their employer must pay them the difference.
Any plan — whether Trump’s or Harris’s — would require an act of Congress.
The Trump campaign was quick to slam Harris as a “copycat,” noting that their proposal, rolled out Jun. 9, was endorsed by the Culinary Union. The union, a powerhouse in Nevada politics, endorsed the Harris-Walz ticket on August 9, the day before Harris’s Las Vegas rally.
How much would it help service workers?
Two-thirds of tipped workers already don’t pay any federal income tax, because they earn so little, according to a report by One Fair Wage, a group advocating for a living minimum wage that applies to tipped workers.
A Yale Budget Lab study puts that figure closer to one third, and notes an additional concern with proposals to eliminate taxes on tips: “The larger and far more uncertain effect would stem from behavioral changes incentivized by the bill, such as substitution into tipped employment and tipped income, which would increase the bill’s overall cost,” the group wrote in their analysis.
The concern is that higher earners, like real estate and stock brokers, or even hedge fund managers, could classify their income as tips for a huge tax break.
Tips have been undertaxed historically, due to the prevalence of cash tips which often go unreported: Most service workers prefer cash tips, since cash is untraceable and can simply be put in one’s pocket.
The Trump campaign noted that under the Biden-Harris administration the IRS has upped enforcement on taxing tips. But as digital and credit-card payments have become more ubiquitous, this form of tax evasion has become less common.
“There are many, many, many establishments that I have worked with, worked for and been associated with, that have done things that are illegal in order to not have their employees tips taxed,” said Christy Nixon, a 37-year-old general manager at a bar in Grant Park. “But that establishment can get screwed over if they ever get an audit on those situations.”
Nixon feels that tips should be tax-exempt, at least to a certain amount, the way the IRS does not tax gifts up to $18,000, the 2024 threshold. “I feel like it shouldn’t be taxed on, because that’s a gift,” she said.
Abby Turano, a spokesperson for the Metro Atlanta Chamber, said in an email that the Trump and Harris proposals have sparked conversations, but the business trade group has more questions than answers for the time being.
“We haven’t seen a thorough economic impact study on these very recent proposals and wonder what the studies will turn up,” she wrote. “It will be particularly interesting to see a proposal that addresses the economic impact in the tax shift – would other taxes be increased to make up the difference? Or would spending be reduced? Nothing detailed has come out just yet, so we’re all curious about more substantive info.”
The Committee for a Responsible Federal budget, a non-partisan watchdog group, estimates that Trump’s plan would add anywhere from $150-$250 billion to the federal deficit over 10 years. The group estimates that Harris’ plan would add $100-$200 billion in the same time frame.
Nixon, the bar manager, raised the concern that waiving the federal income tax on tips could reduce tip amounts, especially if it’s paired with an enforced minimum wage for tipped workers. “I feel like if minimum wage was enforced on tipped employees, then it would make people think that they don’t have to tip, but the minimum wage is not a living wage, so I would rather stay on $2.13 and get tipped.”
But Giede, who makes $3 per hour pre-tip at Waffle House, said that tips are just too variable to rely on, and she struggles to make ends meet for herself and her 5-year-old son.
“It’s so unpredictable,” she said. ”It’s not the customer’s job to pay our wages. The employers are the ones that hired us, and it should be their job to make sure that we’re able to meet our basic needs.”
Thanks for the interesting article. I wonder, do you think removing taxes on tips alone could really improve workers’ situations, or is it more important to raise the base wage to make a real difference?