Sep. 2—LAKE CITY, Minn. — Lake City resident Erica Hoops has been a waitress and bartender at Port 104 for nearly two decades. She finds it lucrative. Because she likes people, enjoys the work, and is good at her job, customers often leave her grateful tips.
And for Hoops, that extra money has made a difference in her life. When Hoops was in nursing school, her tips paid for the necessities — grocery bills and a car — as well as the extra “nice” things. Now that she’s a mom to an 8-year-old and a 6-year-old, the money she earns from tips goes toward family outings and paying off her remaining student loans.
For the first time in a presidential election, the two major party candidates, former President Donald Trump and Vice President Kamala Harris, have turned the spotlight on tipped workers with a promise: no tip taxes.
Trump got the ball rolling months ago. Under his plan, restaurant workers, hairdressers, caddies, movers, drivers and others would not have to pay taxes on their tips.
Harris recently made a similar proposal: Her plan would eliminate the tip tax for hospitality and service providers.
For Hoops, whose tips are now taxed at a total of 30% after federal, state and local levies, the exemption would amount to $30 or more per service, she said.
“It would make more money for me and my family,” Hoops said.
The campaigns’ competing proposals underscore the close nature of the race between Harris and Trump, with polls showing Harris with a narrow lead and an electoral map that could go either way. Both have their eyes on Nevada in particular, one of six swing states that could sway the election, with its high concentration of service providers.
While the political logic behind the plans is compelling, the plan to abolish the tip tax has been criticized by tax experts.
“All I can say is I hope what happens in Vegas stays in Vegas, because these are bad ideas,” said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center in Washington.
He called the plan the perfect “trilogy” of bad tax policy because it fails to meet the three criteria used to evaluate tax proposals: fairness, efficiency and revenue impact.
One of the biggest problems with a plan to eliminate a tax on tips is its arbitrariness. Why should tipped workers get special tax treatment at the expense of others who do similar work?
“What about the person who has a low-wage job and doesn’t get tips?” said Amy Monahan, a Distinguished McKnight University Professor at the University of Minnesota Law School. “People who work in grocery stores or are personal care workers and assistants are low-wage workers who don’t get tips. So you’re treating people who are in the same economic position differently.”
Exempting tips also introduces distortions and inefficiencies into the economy. While tipped workers make up a large portion of the workforce in Nevada, they’re a much smaller percentage elsewhere — 2.5 percent, according to one expert. Still, it’s easy to imagine workers of all kinds clamoring for tax-free tips.
These can range from cleaning staff to dental hygienists who pass around tips, plumbers and auto mechanics, to lawyers and investment bankers.
“What happens is you would expect to see a sorting where people would work for the generous tippers and not for the ones who object to the process,” Rosenthal said. “It’s less transparent, less fair. And there’s no reason to distort the economy in that way.”
And from a revenue standpoint, it could be “quite expensive,” Rosenthal added. Some projections put the cost to the federal budget at $100 billion to $200 billion.
Harris’ campaign said she would work with Congress to develop a proposal that would include an income cap and other provisions to prevent abuse by wealthy individuals, who would be able to structure their compensation so that certain fees are classified as tips.
The requirements would be aimed at preventing hedge fund managers and lawyers from structuring their compensation in ways that exploit the policy. Trump did not say whether his proposal would include such requirements.
Tipped workers tend to be younger, with a median age of 31, and have lower incomes. The median weekly wage for tipped workers in 2023 was $538, compared to about $1,000 for non-tipped workers.
The plan also fails, Monahan said, because low-income workers wouldn’t be the only beneficiaries of such a plan. High-wage workers would be, too. It’s common practice in a number of industries, from fancy salons to luxury restaurants, for high-paid workers to receive tips. Their tips would also be exempt.
“The policy is now even harder to defend,” Monahan said.
The plan is also problematic if the exemption covers not only a portion of their income, but also payroll taxes. The payroll tax funds Social Security and Medicare. It could mean lower Social Security benefits for the recipient.
The idea of exempting tips from taxes isn’t entirely new. Ron Paul floated the idea when he was running for president in 2012. But the idea didn’t get very far. And there’s a reason why such a campaign promise regarding tips never got anywhere near legislation, Rosenthal said.
“The reason it didn’t pass is because it’s absurd,” he said. “You can cajole all you want in Nevada, but ultimately legislation has to be passed. And this idea of exempting tips would have been shot down by both Republicans and Democrats.”
Monahan said policymakers have better tools at their disposal to reduce the tax burden on low-income earners. One would be to increase the standard deduction to exempt more people from federal income taxes altogether. Tax rates at the low end could be further reduced, from 10% to 5%. The Earned Income Tax Credit, which provides work incentives for low-income earners who earn low wages, could be expanded.
“If you really want to address low-wage workers who are really struggling financially and you want to address that through tax code, these are the three most obvious policy tools,” she said.
