By Nathan Lederman 
In a rare instance of political unity, both Donald Trump and Kamala Harris have found common ground on an economic policy focused on eliminating income taxes from tips earned by service workers. Trump initially proposed the plan during a rally in Nevada on June 9, and he first pushed the slogan ‘no tax on tips’. August 10th, Harris followed suit, advocating for a similar plan in front of a crowd in Las Vegas. Currently, any person who is tipped more than $20 in a month must report this income to the IRS and is subject to any applicable state and federal income taxes.
In Harris’s plan, hospitality and service workers making under $75,000 would not pay a federal income tax on tips, and there would also be a limit on the amount of income that can be claimed as tips. additional tips would be taxed as regular income to prevent abuse of the exemption after the cap is exceeded. The plan would not exempt tips from payroll taxes as tips help to fund Medicare and Social Security. Trump has not specified his position on payroll taxes. If tips are not subject to payroll tax, it is estimated Social Security would subsequently lose $900 billion by 2035. Trump criticized Harris’s plan on his website, claiming she supports ending the federal tip credit and supercharging the IRS.
81% of registered voters say the economy is very important to their vote, according to a poll released in September by Pew Research. Specifically, the proposal to end federal taxes on tips has been well received by the electorate, evident by an August poll by Ipsos indicating that 75% of Americans support it.
The proposal could be impactful in the battleground that has the highest concentration of tipped workers in the country at 17%, Nevada. A poll from the Washington Post indicates the state is even more competitive than it was in the last election, with Trump and Harris even at 48%. Within the state, the policy has broad support from prominent Nevada legislators, including both of the state’s senators and Democratic Representative Stephen Horsford. The policy has also received an endorsement from the largest union in Nevada, the Culinary Workers Union Local 226. Outside of the state, it received support from the National Restaurant Association and lawmakers like Senator Ted Cruz of Texas, who introduced the No Tax on Tips Act to Congress in July of this year.
While the proposal has bipartisan support, some independent studies point out that the plan has potential downfalls. A study from The Budget Lab estimates only 2.5% of employed people work in jobs that earn tips. Of that 2.5%, The Budget Lab found that one-third do not earn enough money to pay federal income taxes already. Given the cost of the exemption estimated to be $107 billion, it does not seem to reflect the total number of people affected. The Committee for a Responsible Federal Budget also predicts the policy would cause an increase in the deficit somewhere between $100 billion and $200 billion.
Some argue that the drawbacks of the proposal are not only economical. Ian Berlin and William Gale of the Urban-Brookings Tax Policy Center discuss the notion that this policy could be a ‘slippery slope’, causing more workers to ask for tips than ever before. They cite the scenario where Trump’s plan could allow non-traditional occupations, like lawyers and investment bankers, to begin taking parts of their income as tips, a loophole that could greatly reduce the amount of taxes they owe.
According to Berlin & Gale, this problem stems from giving special treatment to tips as a form of income, causing “an incentive for taxpayers to find ways to label their income that way.” If these shifts materialize, Newsweek predicts there will be an impact on the ‘tipping culture’ that 72% of Americans believe to be increasing. These people have noticed a growing norm of tipping when visiting service-oriented places like restaurants, coffee shops, and bars, aided by digital kiosks and point-of-sale machines like Square that make the process of tipping easier than ever.
Tax avoidance, the incentivization of tips, and the rise in tipping culture in such cases could also extend to employers and businesses looking to make a profit. Currently, the minimum wage in Florida for tipped employees is $9.98 per hour. Berlin & Gale believe that businesses could start asking for tips, “reclassify employees as tipped workers …, only to then also drop their pay to the lower tipped minimum wage.” If this occurs at a Florida business, workers would see their wage dropped to the minimum $9.98 per hour required by law, and tips would have to make up the loss. Their net earnings could be reduced while the company saves money from their lowered wage.