Former President Donald Trump and Vice President Kamala Harris have both expressed interest in eliminating federal taxes on workers’ tips, a proposal that has experts raising concerns about its complexity and potential negative consequences. While Trump announced his plan on June 9 and Harris followed with a similar proposal on August 10, the details of how exactly this change would be implemented remain unclear. Both candidates made their announcements in Nevada, a state with a high number of tipped service workers.
Experts warn that exempting tips from federal taxes could be challenging to enforce and might lead to abuse by higher-paid workers attempting to restructure their compensation to benefit from the tax exemption. There are fears that not only wealthy individuals but millions of workers might exploit the loophole, potentially leading to significant revenue losses for the government.
Harris’s campaign has indicated a willingness to work with Congress to establish guidelines to prevent abuse of the proposed policy by high-income earners. However, questions remain about the specifics of these safeguards. On the other hand, Trump’s campaign has not addressed whether such provisions would be included in his proposal.
Supporters of the tax exemption argue that defining tips precisely could prevent fraud, as the Internal Revenue Service has clear guidelines on what constitutes a tip. Some Democrats have shown support for bills aiming to exempt tips from federal income taxes, emphasizing that the move would benefit low-income workers.
Critics argue that making tips tax-free might not significantly alleviate the financial burden on low-income workers, as many already fall below the income tax threshold. The Budget Lab at Yale suggests that while exempting tip income could benefit 4 million workers in tipped occupations, there are possibly more effective ways to support low-income taxpayers, such as expanding tax credits or adjusting tax rates.
Implementing such a tax policy change would also have substantial financial implications, with estimates suggesting that it could reduce federal revenue by billions of dollars over a decade. As the issue of federal tax policy on tips gains attention during the election campaign, it remains uncertain how Congress will approach this proposal given the potential complexities and costs involved in its implementation.
