Trump vs. Harris: 3 Ways Their Potential ‘No Tax on Tips’ Policies Could Impact You
Written by
Jake Safane
Edited by
Gary Dudak
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While former President Donald Trump and Vice President Kamala Harris disagree on many key issues, one commonality is that they both have proposed eliminating taxes on tips. However, the two candidates seem to differ in how they want this policy to move forward, though the details are still light at this point.
Granted, tax changes like this would require approval by Congress, not just support from the president. Still, the tax policies ultimately proposed by whoever becomes president could have a significant impact on tipped workers such as waiters, bartenders and hotel staff.
In particular, here are three ways that Trump’s and Harris’ no-tax-on-tips policies could affect Americans in different ways — depending on who wins the election.
Loopholes Could Decrease Tax Revenue
While it’s not clear right now exactly who would qualify for this exemption if one comes to pass, it might apply to a narrow pool of workers, considering many tipped workers already don’t pay income taxes.
For example, nearly two-thirds of tipped restaurant workers live in households that do not pay income taxes due to not earning enough money to meet the federal taxable income threshold, according to a One Fair Wage analysis.
However, not taxing tips could end up creating loopholes that higher-income individuals exploit, which would decrease federal tax revenue and could affect future tax and spending decisions.
Currently, there are two bills, one in the Senate and one in the House, introduced by Republicans shortly after Trump proposed not taxing tips. The Senate one, introduced by Senator Ted Cruz (R-TX), only eliminates federal income taxes on tips, while the House one also removes employment taxes, which fund programs like Social Security.
Neither bill has guardrails around who’s allowed to avoid taxes on tips, “meaning that it has the potential to be abused,” said Francine Lipman, a professor at UNLV’s William S. Boyd School of Law, who specializes in tax law. She added that “an exception to taxation should be very narrow,” because if it’s too broad, more people will try to classify their income as tips.
“Indeed, I have heard people like influencers who are paid kind of differently [than traditional salaried workers] suggest that their compensation is really a tip,” she said. In contrast, Harris’ policy has more guardrails according to Lipman.
Details still remain to be seen, but The Washington Post recently reported that Harris is considering capping this tax exemption for service and hospitality workers earning $75,000 per year or less, while also only applying to income taxes, not Social Security and Medicare taxes.
Minimum Wage Could Come Under the Spotlight
Under a Trump administration, not taxing tips could incentivize workers to want more income to fall under tips rather than wages. As such, tipped workers might be in favor of lower minimum wages — something that some employers also support as a way to potentially keep payrolls and taxes down. Trump has previously aligned himself with what’s typically a conservative stance against raising the minimum wage.
In contrast, Harris has simultaneously supported increasing the minimum wage while proposing to not tax service and hospitality workers’ tips. While that could mean higher taxes if a higher proportion of income comes from wages rather than tips, the increased pay could still potentially leave workers with more after-tax income.
Following Harris’ announcement of her support to not tax tips, the Nevada Current reported that Congressman Steven Horsford (D-NV) will be introducing legislation that both eliminates taxes on tips — while putting in guardrails to stop high-income workers from exploiting this policy — and eliminates the subminimum wage, which in most states allows employers to pay tipped workers as little as $2.13 per hour.
By banning the subminimum wage, and potentially increasing the minimum wage, service and hospitality workers could gain benefits like more income security, let alone higher incomes.
“It is kind of nefarious, if you think about it, that in some places, a tipped employee is being paid like $4,000 from the employer a year, and they truly depend [on tips from customers] to just pay their rent,” said Lipman. “It just doesn’t make common sense, because the tip could depend upon something completely outside of the control of the service provider.” (For instance, if the business runs out of certain ingredients and a server can’t deliver what the customer wants.)
“This is not fair. I want all employees to be paid a living wage outside of my discretion to give them a tip. That’s what was the point of a tip. It has gone in the wrong direction. And I think workers in this environment are right in saying this is kind of crazy,” she added.
Tipped Workers Could Face Challenges of a Lower Reported Income
Lastly, no-tax-on-tips policies could end up hurting some workers if it means they report lower income on their tax returns, particularly if it means having no payroll taxes.
“That is a potential concern, because if you don’t pay into Social Security and Medicare, then you don’t get the benefits when you retire. And hospitality and service workers who really are the focus of this potential change, they depend on Social Security and Medicare benefits when they retire. So not paying in over time on a significant percentage of your income could end up hurting you in the long run,” said Lipman.
Also, lower reported income could affect eligibility for tax credits like the Earned Income Tax Credit (EITC), along with qualifying for loans or meeting a landlord’s income requirements. “That’s why we need people to be careful what they ask for. Just don’t throw a bill out there. Let’s think it through,” said Lipman.
Instead, individuals might prefer to assess these policies in the context of broader tax and economic issues.
“Individual workers should be thinking about what works for their household budgeting issues,” said Lipman. “Having a reliable source of income is critical to planning for any family.”
She added, “And so I think there should be a bigger push, not on excluding tips, which necessarily have to be discretionary, but on getting a living wage and other types of benefits.”
Editor’s note on election coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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