Ending Taxes on Tips Is Controversial Even Though Trump and Harris Both Want It

Vice President Kamala Harris and former President Donald Trump have both endorsed a policy to eliminate federal taxes on tips, a rare instance of agreement between the two campaigns as they aim to sway a critical bloc of voters.

While the policy could address some immediate concerns of service and hospitality workers, it has sparked significant debate over its budgetary implications, fairness, and potential impacts on the broader labor market. 

During a rally in Las Vegas on Saturday, Harris unveiled her proposal to end taxes on tips, positioning it as a potential cornerstone of her forthcoming economic platform. “It is my promise to everyone here: When I am President, we will continue our fight for working families of America, including to raise the minimum wage and eliminate taxes on tips for service and hospitality workers,” she said at the University of Nevada, Las Vegas.

A Harris campaign official tells TIME that the proposal would require legislation and that she would push for it alongside an increase in the minimum wage: “As President, 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,” the official says.

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Harris’s proposal comes after Trump floated a similar policy in June, after he had a conversation with a Las Vegas waitress that highlighted the financial burden of taxed tips. “To those hotel workers and people who get tips, you are going to be very happy, because when I get to office we are going to not charge taxes on tips, people making tips,” Trump said at a rally. “We’re going to do that right away, first thing in office.”

Trump has accused Harris of borrowing his policy for political gain. “This was a TRUMP idea—She has no ideas, she can only steal from me,” Trump posted on Truth Social on Saturday, branding Harris as “Copy Cat Kamala.” Trump’s campaign has also said Harris’s stance contradicts the Biden Administration’s previous proposals to establish a voluntary tip-reporting program.

Economists say the proposed elimination of taxes on tips could have profound effects on both federal revenue and the labor market.

The Center for a Responsible Federal Budget (CRFB) estimated that Harris’ proposal to exempt tip income from federal income taxes and raise the minimum wage would increase deficits by $100 billion to $200 billion over the next decade, while the Trump proposal to nix federal taxes on tips could cost up to $250 billion. The conservative-leaning Tax Foundation estimated that removing taxes on tips could cost around $107 billion over the next decade by lowering income and payroll tax revenues that currently support Social Security and Medicare. The potential shortfall has raised concerns about how such a policy would impact the already strained federal budget.

But advocates argue that eliminating taxes on tips would alleviate a financial burden on service workers, many of whom rely on tips for their livelihoods. Currently, tips are considered taxable income, which requires both accurate reporting by workers and enforcement by the Internal Revenue Service (IRS). The IRS has struggled with compliance and enforcement, leading to ongoing debates about the fairness and feasibility of taxing tips.

An estimated 4 million workers regularly receive tips—less than 3% of the overall workforce, according to an analysis by Yale University's Budget Lab. The federal minimum wage for tipped workers is $2.13 an hour, but they are required to make at least the federal hourly minimum wage of $7.25 with tips or their employers have to cover the difference. 

Detractors believe that the policy would exacerbate existing inequities in the tax system. Andrew Lautz, associate director for the Bipartisan Policy Center’s economic policy program, cautions that the policy might create a two-tiered system where tipped workers enjoy a substantial tax advantage over their non-tipped counterparts, a disparity that could distort wage structures and incentivize employers to shift more compensation to tips to benefit from lower tax rates.

“Are we to say that someone making $18 an hour at a fast food job, versus someone making $18 an hour inclusive of tips at a sit-down restaurant, that those workers should be treated differently from a tax perspective?” Lautz asks. “Policymakers need to carefully consider what it means for fairness in the U.S. economy and in the jobs that people seek out.”

For example, the policy might drive more industries—like grocery stores—to adopt tipping practices similar to those in the restaurant sector, thereby increasing the overall cost of the policy. The proposal could also lead to increased pressure on workers to solicit tips, potentially leading to less predictable and less stable income. 

Lautz also raised concerns about the administrative challenges of implementing such a policy.   “There's always the potential for misuse or abuse of rules like this,” he says. “The intent is not to have high paid lawyers and accountants re-classify their income as tips and escape some level of taxation.” He says that Congress would need to either write specific rules or direct the IRS to write provisions that limit misuse or abuse of the no tax on tips policy.

Both the Harris and Trump campaigns have yet to release detailed policy proposals, leaving many questions unanswered about how their plans would be implemented and financed. The next administration will face significant challenges in navigating these issues, particularly as major sections of the 2017 tax cuts are set to expire and broader tax reform discussions loom.

Still, exempting tip income has already gained bipartisan traction on Capitol Hill. In July, Democratic Senators Catherine Cortez Masto and Jacky Rosen of Nevada signed onto the No Tax on Tips Act that Republican Senator Ted Cruz of Texas proposed. A companion bill has been introduced in the House of Representatives.

President Joe Biden also supports eliminating taxes on tips, White House Press Secretary Karine Jean-Pierre said Monday. The Culinary Workers Union, a powerful Nevada labor union, had initially called the proposal by Trump a “wild campaign promise” but has since come out in support of the general idea.