HomePoliticsTrump proposes to make tips tax-free. What would that mean for...

Trump proposes to make tips tax-free. What would that mean for the employees?

WASHINGTON (AP) — Former President Donald Trump’s new proposal to exclude tips from federal taxes is drawing praise from some Republican lawmakers, though big questions remain about the impact of the policy and how it would work.

What is certain is that a change in tip taxes would impact millions. The U.S. Bureau of Labor Statistics estimates that there are 2.24 million waiters and waitresses nationwide, with tips making up a large percentage of their income.

A look at what Trump is proposing and the possible political and economic consequences:

TRUMP’S ELECTION YEAR PITCH IN NEVADA

Trump announced his tax-free tipping plan at a June 9 rally in Nevada, a key state with six electoral votes in the race for the White House. President Joe Biden won the state in 2020, but the Trump campaign hopes to put the state in play this fall.

Nevada has the highest concentration of tipped workers in the country, with approximately 25.8 waiters and waitresses per 1,000 jobs, followed by Hawaii and Florida.

“To those hotel workers and people who get tips, you’re going to be very happy because when I get into the office, we’re not going to tax tipped people, people who tip people,” Trump said at the meeting. “… We will do that immediately, first in the office.”

The field provides a sharp political contrast between Democrats and Republicans. While Trump has assumed a tax cut would help workers, Democrats have generally endorsed efforts to raise hourly wages — and it’s an open question which approach resonates more with voters.

The Culinary Union, which represents 60,000 workers in Las Vegas and Reno and supports Biden, dismissed Trump’s plan as a stunt.

“Help is certainly needed for tip earners, but Nevada workers are smart enough to know the difference between real solutions and wild campaign promises from a convicted felon.” Culinary Union Secretary-Treasurer Ted Pappageorge said in a statement.

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Lael Brainard, director of the White House National Economic Council, declined to comment on the idea floated by Trump because as a federal employee she is not expected to discuss campaign politics.

“What I can say is that President Biden has fought for real solutions that actually meet workers’ legitimate needs for fair wages, we think, much more effectively,” she said, adding that tipped workers in Nevada will receive an income increase of would get $6,000 from a higher minimum wage and the elimination of the tipped minimum wage.

HOW WOULD THE TAX EXEMPTION WORK?

Trump has not indicated whether he wants to exempt tips from only income tax or also from payroll tax. The Medicare and Social Security payroll tax funds.

For employees, a general exemption would mean a higher net salary. And for the federal government, it could mean bigger budget deficits.

The Committee for a Responsible Federal Budget, a nonpartisan budget watchdog group, has estimated that exempting tips from both income and payroll taxes would reduce federal revenues by $150 billion to $250 billion over the next decade.

The commission said exempting tips from taxation would also result in employers and employees reclassifying wages as tips wherever possible. The more that happens, the more federal deficits will increase. For example, a 10% increase in tips would push the commission’s forecast for lost federal revenue over the next decade to a range of $165 billion to $275 billion.

Congress would undoubtedly examine Trump’s proposal on tips as it considers which parts of the Tax Cuts and Jobs Act of 2017 may expire after next year, including lower individual tax rates. Lawmakers are already preparing for this task, although Trump’s proposal is something many had not considered until recently.

Rep. Vern Buchanan, R-Fla., a senior member of the House Ways and Means Committee, said lawmakers will have to consider the total cost of the tipping proposal and how to pay for it.

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“I want to be sensitive because they work hard, you can’t find enough waiters, and obviously a big part of their income is tips,” Buchanan said. “All these programs sound good. Everyone would like to pay less taxes, but we have to pay the bills.”

“I know he’s trying to make sure that people with that income get as much relief as possible. We might be able to do the same by making his tax cuts more permanent and more likely to appeal to lower-income people,” said Rep. Kevin Hern, R-Okla., who also serves on the Ways and Means Committee, which jurisdiction over tax policy.

TRADE-OFFS OF NOT TAXING TIPS

Like many tax proposals, Trump’s push to exempt tips could have unintended consequences.

Howard Gleckman, a senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, said Trump’s proposal could backfire for many tipped workers.

For example, some customers respond to tax-free tips by reducing their tips. Second, it could offset efforts in some states to gradually raise the minimum wage for tipped workers so that their base pay comes in line with the minimum wage for other workers.

“The allure of tax-free income could turn many workers against the shift from tips to wages,” Gleckman wrote in a blog post.

Gleckman also wondered why a service worker should avoid tax on tips, as opposed to a warehouse worker who makes the same amount. He noted that while Trump promised to immediately repeal the tip tax, only Congress can repeal federal taxes, and “let’s hope that for reasons of efficiency, fairness and good tax administration, that doesn’t happen.”

LOOKING FORWARD

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Democrats have largely dismissed Trump’s proposal as a gimmick to win over voters.

Sen. Debbie Stabenow, a ranking member of the Senate Finance Committee, noted that she was a waitress in college, calling it “really hard work.” She favors raising the minimum wage for tipped workers so that it is equal to the minimum wage for other workers.

“From my perspective, I don’t think Trump’s proposal is serious, and I don’t think it does enough to appeal to low-wage working people,” Stabenow said.

Sen. Ron Wyden, the chairman of the Senate Finance Committee, said Trump “casually threw out a lot of ideas,” but his record as president reflects an emphasis on tax breaks for the wealthy and corporations.

“All these things he throws away every day, I’ll believe it when I see it,” Wyden said.

But Trump’s enthusiasm for the idea appears to be growing. The tax pledge has since become a staple of Trump’s rallies and rallies, and he floated his proposal last week during a meeting with Republican lawmakers and business leaders in Washington.

“I actually think it’s a very smart idea. The men and women who rely on tips for their earnings are working their butts off,” said Sen. Ron Johnson, R-Wis. “That is a very good, targeted tax reform.”

Some lawmakers and allies have started tweeting photos of their restaurant bills with handwritten messages intended to spread Trump’s pledge. Rep. Derrick Van Orden, R-Wis., wrote “Vote Trump!” and “No tax on tips!” on his bill from a restaurant in Milwaukee.

The musician Kid Rock, a prominent Trump supporter, shared a photo on X.

“A vote for Trump is a vote for no tax on tips!!” he wrote on his receipt. According to the photo, he tipped $400 on a $1,143 bill at an expensive steakhouse.

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Associated Press writer Jonathan J. Cooper in Phoenix contributed to this report.

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