Trump’s Tax-Free Tips Idea Attracts Even Once-Wary Democrats

While momentum is growing on both sides of the aisle for former President Donald Trump’s proposal to exempt tips from income taxes, some lawmakers are warning that deep faults in the idea could hurt workers in the long run.

Trump made the pitch last month at a campaign rally in Las Vegas—home to many service workers—but gave few details. Yet the idea is front and center in the Republican National Committee’s 2024 platform as the party’s convention takes place in Milwaukee this week.

Lawmakers have quickly introduced bills to make tips tax-free as House Speaker Mike Johnson (R-La.) has said it may be part of a potential Trump administration’s first 100 days’ agenda next year when tax policy will be front and center.

Trump’s plan added to an already-fraught debate over compensation for workers who earn tips but also make far less than the national federal minimum wage of $7.25 an hour. And while many are wary of the former president’s political motivations, Democrats and a powerful union are warming to an idea they say could pump cash into workers’ pockets.

While he doesn’t agree with most of Trump’s ideas, “even a broken clock is right twice a day—he may be right about this one,” said Rep. Ritchie Torres (D-N.Y.) “Tipped workers are among the lowest income, I can see myself supporting tax relief for those with the lowest incomes.”

Others, though, caution that such a proposal likely would have consequences for how workers claim favorable tax breaks such as the child tax credit, suppress workers’ wages, and take steam out of the movement to eradicate the subminimum wage for tipped workers.

Republican lawmakers, too, have reservations about making tips tax-free. Only 5% of workers who make $17.66 or less per hour are tipped, according to a report by the Budget Lab at Yale.

“I’m all for getting rid of taxes on hardworking Americans, but I don’t know why you’d pick one type of worker over another,” Rep. Chip Roy (R-Texas) said. “Why are you going to say the cook has to pay taxes, but the server doesn’t?”

Popular Idea

Separate bills from Sen. Ted Cruz (R-Texas) and Rep. Thomas Massie (R-Ky.) would exempt tips—in the form of cash, credit and debit card charges, and checks—from federal income tax by allowing taxpayers to claim a 100% above-the-line deduction. Cruz’s bill has already attracted official Democratic support, with Nevada Sens. Jacky Rosen and Catherine Cortez Masto signing on as sponsors.

Workers still would be required to report tips to employers, so payroll taxes would remain the same. State taxes, too, likely would still apply.

“Taxing tips is regressive and goes against American tradition,” Massie said. “But now digital payments allow the government to tax every transaction, even those that historically have not been taxed. With inflation raging, it only makes sense to eliminate the tax on tips and provide relief to working folks.”

The powerful Nevada Culinary Workers Union Local 226—which was quick to call Trump’s announcement a “wild campaign promise"—supports Cruz’s bill. The bill is a “starting point” that could lead to tax relief for tipped workers, said the union’s secretary-treasurer, Ted Pappageorge.

“There is finally an avenue, possibly here with this bill in the Senate, to put a spotlight on the relief” to tipped workers, he said. “They are not tax cheats, they’re willing to pay their fair share of taxes—but it needs to be fair.”

Other Democrats, including Ways and Means ranking member Richard Neal (D-Mass.), dismissed the idea as electoral politics.

“I don’t think any of his proposals he’s put out are serious as it relates to tax,” Neal told reporters in June.

Rep. Ro Khanna (D-Calif.) said in an interview that it’s “worth looking at” exempting tips from taxation. Rep. Susie Lee (D-Nev.) said she supports the proposal but is skeptical of Trump’s motives.

“Given that Trump has traditionally given tax breaks to the wealthiest and big corporations, I’m not 100% sure I trust it,” Lee said. “I support it if it keeps money in the pockets of hard-working Americans.”

Other Democrats said Trump is looking at the wrong place if he wants to improve the lives of workers who depend on tips, and he should instead focus on phasing out the subminimum wage that allows employers to pay as little as $2.13 per hour in states without a higher rate than the federal mark.

Several states are moving to phase out the subminimum rate, but giving tax benefits to tipped workers could hamper the effort, some Democrats point out.

Tax, Labor Consequences

Making tips tax-exempt can create a series of unintended consequences.

The proposal could boost tax avoidance and create budget problems for next year, when many of the 2017 tax cuts expire, said Andrew Lautz, associate director for the Bipartisan Policy Center’s economic policy program.

Over $4 trillion of those tax cuts expire next year, and the Committee for a Responsible Federal Budget estimates that Trump’s plan would add between $150 billion and $250 billion to the deficit over 10 years.

That estimate likely doesn’t include the possibility that more professions, such as doctors, lawyers, or hedge fund managers, would move to embrace tips, or that more people may go into the service industry over other professions, Lautz said. Lawmakers, the Treasury Department, and the IRS would have to be on the lookout for “misuse or abuse” of any system, he said.

Adopting this tax policy may also result in employers resisting wage hikes, using the workers’ new tax benefit as an excuse to keep pay stagnant, said Heidi Shierholz, president of the Economic Policy Institute. Businesses also could adopt a tipping model that would move their workers into a lower-wage category, cutting their labor costs, she added.

Others argue that the exemption could hurt workers’ access to critical social programs like the child tax credit, and impact their credit ratings given their lower income reported to the IRS, if they pay any federal income taxes.

“Republicans have been very insistent that they do not want the full child tax credit to be available to families that don’t owe income taxes,” said Brendan Duke, senior director for economic policy at the left-leaning Center for American Progress. “That obviously limits how much of a tax cut families who pay very little in income taxes get.”