Tax Cuts on Tips: Implications for Workers and Employers

In a growing political debate, former President Donald Trump and Vice President Kamala Harris are advocating for a tax exemption on tips for service and hospitality workers. This proposal, aimed at approximately 4 million Americans, claims to lift the financial burden off service workers in a high tipping culture but raises significant concerns among economists. Experts argue that cutting taxes on tips could greatly benefit employers, potentially leading to a reduced incentive to raise wages and perpetuating income inequities among low-wage workers. Currently, tips are taxed as income, impacting the federal and state budget significantly. The Harris campaign's plan suggests that this tax exemption would only apply to income taxes and might have a fiscal impact of around $150 billion over the next decade. However, critics state that more than one-third of tipped workers do not earn enough to meet the federal income tax threshold. Ultimately, economists fear that the proposed exemption may exacerbate an already inequitable wage structure, leading to higher tipping culture while primarily benefiting employers instead of workers. A push for bipartisan support is evident as discussions about this policy have ramped up recently, with an expectation that such legislation could be introduced in Congress soon.