Trump Advances Plan to End Tax on Tips, Experts Express Doubts

*Georgia Recorder* President Donald Trump has unveiled a plan to end the 17.6% payroll tax on tips received by service industry workers, a move that has been met with skepticism by some experts. The plan, announced at a recent roundtable meeting with industry leaders, would eliminate the Social Security and Medicare tax that is currently applied to tips. The president argued that the tax is unfair to workers who rely on tips as a significant portion of their income. “We’re going to end the tipped minimum wage,” Trump said. “We’re going to end the tax on tips. Tips should not be taxed.” The plan has been met with mixed reactions. Some groups representing service industry workers have welcomed the proposal, arguing that it would provide much-needed relief to those who work hard and earn a modest income. However, other experts have expressed doubts about the plan’s feasibility and effectiveness. The Congressional Budget Office (CBO) has estimated that eliminating the tax on tips would cost the federal government $32 billion over the next decade. Critics argue that this would add to the national debt and reduce funding for important social programs. Furthermore, some experts argue that eliminating the tax on tips would not necessarily lead to higher wages for service industry workers. They point out that employers may simply reduce their wages to offset the savings they gain from not having to pay payroll taxes on tips. “The reality is that many employers don’t have the margins to pay higher wages,” said John Gordon, a restaurant industry consultant. “They’ll just end up pocketing the savings.” The plan faces significant hurdles in Congress. Democrats have largely opposed the proposal, arguing that it would benefit wealthy restaurant owners at the expense of low-wage workers. Republicans have also expressed concerns about the cost of the plan and its potential impact on the budget. Despite the challenges, the Trump administration has indicated that it is committed to moving forward with the plan. It remains to be seen whether the proposal will ultimately become law or if it will be met with the same fate as other Trump tax cuts that have failed to gain bipartisan support.“`“`

WASHINGTON—Economists from across the ideological spectrum this weekend cast doubt on the cost and feasibility of former President Donald Trump’s proposal to exempt tips from federal taxes if he wins in November.

At a campaign rally Sunday in Las Vegas, where hundreds of thousands of people work in the hospitality industry, Trump promised service members they would no longer have to pay federal taxes on tipped income if the presumptive Republican nominee wins a second term.

According to the latest available data from 2018, the roughly six million U.S. workers make up a small share of the country’s 150 million taxpayers, but campaigning for tax cuts for certain demographics is increasingly a top issue ahead of November’s presidential election+.++.

“This is the first time I’m saying this, and for those who work in hotels and people who get tips, you’ll be very happy because when I come to the office, we’re not going to tax tips, tip people.”+, Trump said during the meeting.

Trump said he will do so “right away, the first in office,” although changing the tax law would require an act of Congress.

Tax code needs to be updated

Large parts of the sweeping 2017 tax law that Congress passed along party lines during the Trump administration are set to expire at the end of 2025, and lawmakers and advocates are already laying out their priorities.

Tipped workers earned an average of $6,000 on top of their base pay in 2018, and together they paid about $38 billion in taxes on tips, according to the latest figures from the Internal Revenue Service.++In 2018, the IRS collected a total of about $7 trillion in taxes.

“In terms of the macroeconomic impact, it’s quite small,” said Erica York, a senior economist and research director at the right-wing Tax Foundation.

“If you look at it in terms of what Congress will debate next year, one of the big challenges that lawmakers will face is the impact on revenues.++Every dollar of tax revenue for one type of tax cut is $1 less for another type of tax cut.++So it becomes a real exercise in prioritizing trade-offs between different policies,” York said.

Trump has pledged to extend all tax cuts passed under his watch, but the cost of extending them over the next decade would be $4.6 trillion, according to estimates from the Joint Committee on Taxation and the nonpartisan Congressional Budget Office.

Trump’s proposal to tip workers “smacks more of campaign politics than a really well-thought-out and principled tax policy proposal,” York added.++“And I think the elephant in the room for both candidates is that they haven’t fully discussed ‘what are you going to do about these huge expirations that are scheduled for next year?’”

The Trump campaign did not respond to requests for further details.

Encouraging tipped work

Andrew Lautz, deputy director of the Bipartisan Policy Center, said that while tipped workers make up a “tiny slice” of the tax base, “you’re talking about a potentially large chunk of revenue that you’re giving up on an annual basis.”++depending on how the policy will be rolled out.

“Our current tax system is certainly not designed to treat all income equally, but this proposal, if enacted into law, would add a new category of income that is not subject to tax,” Lautz said.++“And you know what economic theory would say:+All else being equal, making that change would encourage people to receive tips that would not be taxed under this proposal versus regular wage income.”

There is also the possibility of “abuse,” he added.

“If Donald Trump is president again next year, and even if he isn’t, but this proposal catches the attention of policymakers in Congress, it’s entirely possible this could be on the table,” Lautz added.

Janet Holtzblatt, a senior fellow at the left-leaning Tax Policy Center at the Urban Institute and Brookings Institution, said Trump’s proposal to eliminate taxes on tips is “unusual.”

“Because tips are a substitute for the wages and salaries that the rest of us get, and if you don’t tax tips, you’re basically not taxing tipped workers+(on)+their wages, so it provides a tax benefit on their income.++Those of us who do not work in tipped industries would not receive the same tax benefit,” Holtzblatt said.

Minimum wage

The wage laws of several places allow employers to pay service workers hourly rates well below the federal minimum wage.

Holtzblatt said the “solution” is for municipalities to increase the minimum wage for service workers for several reasons.

“Tips are not always a predictable form of income,” she says.++“And there is a lot of variation:+the tips the waiter gets in the top restaurant will be very different from the tips the person in the restaurant gets.”

President Joe Biden’s reelection campaign responded to Trump’s “wild campaign promise” by saying Biden supports raising the minimum wage and eliminating the tipped minimum wage,+“a much bigger deal”+than Trump’s proposal, a campaign spokesperson wrote in Monday an email to States Newsroom.

Ted Pappageorge, secretary-treasurer of Culinary Workers Union Local 226, which has 60,000 members in Las Vegas and Reno, Nevada, said the organization has been “fighting for the rights of tipped workers and against unfair taxation” for decades.

“Relief is certainly needed for tip earners,” Pappageorge said in a statement this weekend.++“But Nevada workers are smart enough to know the difference between real solutions and wild campaign promises from a convicted felon.”