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Though supporters say the measures are designed to help low-wage workers, many experts say that making tips tax-free would provide limited help to those workers.
WASHINGTON — Former President Donald Trump and Vice President Kamala Harris agree on one thing, at least: Both say they want to eliminate federal taxes on workers’ tips.
But experts say there’s a reason Congress hasn’t made such a change already. It would be complicated, not to mention enormously costly to the federal government, to enact. It would encourage many higher-paid workers to restructure their compensation to classify some of it as “tips” and thereby avoid taxes. And, in the end, it likely wouldn’t help millions of low-income workers.
“There’s no way that it wouldn’t be a mess,” said James Hines Jr., a professor of law and economics and the research director of the Office of Tax Policy Research at the University of Michigan’s Ross School of Business.
Both candidates unveiled their plans in Nevada, a state with one of the highest concentrations of tipped service workers in the country. Trump announced a proposal to exclude tips from federal taxes on June 9. Harris announced a similar proposal on Aug. 10.
Details have been sparse. Neither candidate's team has said whether it would exempt tips only from income taxes, only from payroll taxes or both. The payroll tax funds Social Security and Medicare.
Harris’ campaign has said she would work with Congress to draft a proposal that would include an income limit and other provisions to prevent abuses by wealthy individuals who might seek to structure their compensation to classify certain fees as tips.
Her campaign said these requirements, which it did not specify, would be intended “to prevent hedge fund managers and lawyers from structuring their compensation in ways to try to take advantage of the policy.” Trump's campaign has not said whether its proposal would include any such requirements.
Even so, Hines suggested that millions of workers — not just wealthy ones — would seek to change their compensation to include tips, and could even do so legally. For example, he said, a company might set up a separate entity that would reward its employees with tips instead of year-end bonuses.
“You will have taxpayers pushing their attorneys to try to characterize their wage and salary income as tips,” Hines said. “And some would be successful, inevitably, because it’s impossible to write foolproof rules that will cover every situation."
Republican supporters of Trump argue that Hines' concerns are overblown. Darin Miller, a spokesman for Sen. Ted Cruz of Texas, said the Internal Revenue Service has a precise definition for tips and contended that reclassifying wages would be considered fraud.
Miller noted that some Democrats have signed on to co-sponsor a bill Cruz introduced in June that would exempt tips from federal income taxes. A bill exempting tips from payroll and income taxes has also been introduced in the House.
Though supporters say the measures are designed to help low-wage workers, many experts say that making tips tax-free would provide only limited help to those workers.
The Budget Lab at Yale, a non-partisan policy research center, estimates that there were 4 million U.S. workers in tipped occupations in 2023. That amounted to about 2.5% of all employees, including restaurant servers and beauticians.
Tipped workers tend to be younger, with an average age of 31, and of lower income. The Budget Lab said the median weekly pay for tipped workers in 2023 was $538, compared with roughly $1,000 for non-tipped workers.
As a result, many tipped workers already bear a lower income-tax burden. In 2022, 37% of tipped workers had incomes low enough that they paid no federal income tax at all, The Budget Lab said.
“If the issue is you’re concerned about low-income taxpayers, there are a lot better ways to address that problem, like expanding the Earned Income Tax Credit or changing tax rates or changing deductions,” Hines said.
In her speech in Nevada, Harris also called for raising the federal minimum wage. (The platform on Trump’s campaign site doesn’t mention the minimum wage.)
Changing federal tax policy on tips would also be costly. The Committee for a Responsible Federal Budget, a non-partisan group, estimates that exempting all tip income from federal income and payroll taxes would reduce revenue by $150 billion to $250 billion between 2026 and 2035. And it said that amount could rise significantly if the policy changed behavior and more people declared tip income.
Whether Trump or Harris wins the presidential election, tax policy will be high on Congress’ agenda in 2025. That’s because Trump-era tax cuts, passed in 2017, are set to expire. But Hines said he thinks Congress will be in no hurry to add “vast amounts of complexity” to the tax code.
“A presidential candidate can say whatever they want, but it's the House and Senate that have to do it,” he said.
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