Trump and Harris’ plans to end taxes on tips may sound good to some, but may be tough to do

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 presidential nominees.

But experts say there’s a reason Congress hasn’t made the change already: It would be complicated and enormously costly to the federal government.

"There’s no way that it wouldn’t be a mess," 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, told the AP.

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.

Harris, Trump unveil plans to end taxes on tips

Both candidates unveiled their plans in Nevada, a state with one of the highest concentrations of tipped service workers in the country.

During a rally in Las Vegas on Saturday, Harris touted her proposal to end taxes on tips. 

"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 told the public.

Trump also announced his proposal to exclude tips from federal taxes on June 9 – two months before Harris.

Both the Harris and Trump campaigns have yet to release details about their proposals, leaving questions unanswered about how their plans would be implemented or financed.

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.

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"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."

But advocates claim that eliminating taxes on tips would alleviate a financial burden on service workers, many of whom rely on tips for their livelihoods. 

Republican supporters of Trump also 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.

Currently, tips are considered taxable income, which requires both accurate reporting by workers and enforcement by the Internal Revenue Service (IRS).

4 million US workers receive tips for work

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.

But, according to the lab, 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. 

"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 continued.

This story was reported from Los Angeles.