As he campaigned in Nevada before the election, Donald Trump wooed casino servers with an idea so simple and politically powerful that one strategist called it a metaphor for how the Democrats lost the working class: ending taxes on tips.
Trump never explained how the proposal would work, how much it would cost, or who exactly would benefit. The proposal nonetheless caught fire with Nevada Democrats and drew a copycat proposal from Vice President Kamala Harris.
When Trump’s 2017 tax cuts expire next year, the debate will give the president a chance to follow through on his proposal. It will be an early test of whether his gestures at economic populism are any more real in his second term than his first, when the benefits of tax breaks flowed mostly to the wealthy.
Some labor leaders said the relief for workers would be welcome, but the tax cut on tips would be a hollow gesture if it isn’t paired with a higher minimum wage.
“Without taking that on, it’s a failure,” said Ted Pappageorge, the secretary-treasurer of Nevada’s Culinary Union. “And especially to the primary targets, the folks who are lower-income tip earners.”
Momentum, for Something
There appears to be momentum for some kind of tax break. In June, House Speaker Mike Johnson, R-La., promised to pass the tax exemption for tips within the first 100 days of the next Congress.
They could figure into the major GOP agenda item on deck for the start of the next congressional session: the expiration of the 2017 tax cuts, which sunset at the end of 2025.
Erica York, a senior economist and research director at the Tax Foundation’s Center for Federal Tax Policy, said she thought Trump and Congress would try to pass some kind of legislation.
“I think because it was so central to the campaign — I mean it was on campaign signs, it became a campaign slogan — there will be some push to put it in a package, maybe even just temporarily,” York said.
The cost of the tax break could total somewhere between $100 and $120 billion over 10 years, according to the right-leaning Tax Foundation. Others have put the cost as high as $250 billion.
A proposal that large could prove a sticking point as congressional Republicans haggle over how big a deficit they are willing to run to cut taxes. Trump’s lack of specificity has given Congress plenty of wiggle room, however.
“They could make it something that is very difficult to utilize, or they could make it something that is wide open and invites a lot of gaming,” York said. “My sense is if they actually follow through on it, they would try to target it very narrowly, partly just for budget concerns.”
“Brilliant Political Gut Move”
Other than slapping tariffs on China, there may be no economic policy that Trump touted more often than ending taxes on tips.
Trump first floated the idea in June, claiming he was inspired by a waitress at a restaurant. In the months that followed, he campaigned in front of banners and signs that read “No tax on tips.”
Trump never followed up with key details, including whether the proposal would cover Social Security and Medicare taxes in addition to income.
For Mark Longabaugh, a Democratic strategist who advised Vermont independent Sen. Bernie Sanders’s 2016 presidential campaign, the fact that Trump came out with the idea first was “a metaphor for how Democrats have lost touch with the working class.”
“This is a perfect example of just a brilliant political gut move by Donald Trump to connect with working-class voters,” Longabaugh said. “The one thing I will say for the Democratic Party on this one, they got slapped in the face and said, ‘Oh yeah, this is a good issue. We’re for it too.’”
Following Trump’s initial mentions of ending taxes on tips, Sen. Ted Cruz, R-Texas, introduced legislation that would implement the tax cut. Within weeks, both Democratic senators from Nevada, Jacky Rosen and Catherine Cortez Masto, signed onto the bill.
Soon, Rep. Steven Horsford, D-Nev., introduced his own bill, which would also eliminate the sub-minimum wage for tipped earners. Polls showed the idea of ending taxes on tips has broad support, including 75 percent of Democrats.
By August, Harris had rolled out her own, much more detailed proposal. Her exemption would apply only to service and hospitality workers and only be available to those earning less than $75,000 a year.
“Complex Carveout”
Trump’s idea may have been a messaging coup, but economists across the political spectrum called it terrible public policy.
Among their many objections: In the bottom income tax bracket of hourly wage earners, only about 5 percent of workers make money in tips. Tip earners are disproportionately younger and many earn so little that they already pay no income taxes.
Liberal critics said the proposal could relieve pressure on employers to raise wages before taxes. Workers would also lose Social Security and Medicare benefits if those taxes are excluded.
Exempting tips from taxes could also spur employers to make more positions dependent on tips, increasing the tip fatigue that has set in since the pandemic. It could also create a tax loophole for Wall Street types to exploit, critics warned.
“It’s not very well targeted to working-class households who need relief.”
York, the economist, said the proposal would do nothing to help many of the working poor.
“It’s not very well targeted to working-class households who need relief,” York said.
“In an ideal scenario, it would be best to abandon this idea and instead enhance the Tax Cuts and Jobs Act of 2017 in a way that is straightforward and unbiased: providing relief to people rather than creating a potentially intricate carveout for only a subset of workers.
It is uncertain what will happen with regards to taxes on tips, but a Congress controlled by the GOP appears ready to prioritize other issues over those important to organized labor.
For a long time, restaurant organizers have been working towards making it easier to unionize restaurants and increasing the federal minimum wage for tipped workers, which currently stands at a meager $2.13 per hour.
During his initial term, the Trump administration attempted to make unionizing more difficult, and efforts to raise the minimum wage were unsuccessful. His tax cuts mainly benefited the wealthy, and proposed changes to tip pooling were met with concern by restaurant organizers, who warned it could be disastrous.
The Culinary Union initially opposed Trump’s suggestion to exempt tips from taxes, viewing it as a political maneuver, but eventually came to support it.
Pappageorge, the union’s secretary-treasurer, emphasized that any move to exempt tips from taxes must be coupled with an increase in the minimum wage for tipped workers to have a significant impact.
“He also pledged no taxes on overtime. We would jest that eventually he would promise no taxes at all,” Pappageorge remarked. “He is not trustworthy — and it is difficult to predict which of his promises he will actually fulfill.”
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