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“No taxes on tips” sounds great for restaurant workers, but it won’t actually do much
As the presidential campaign heats up ahead of the November election, both Democratic nominee Kamala Harris and Republican nominee Donald Trump are feverishly rolling out policy proposals that will hopefully win them votes. This week brought a rare moment of political unity among the two candidates, as Harris announced support for a plan that would eliminate taxes paid on tips given to restaurant workers and other tipped employees who make the federally mandated tipped minimum wage of $2.13/hour.
Trump actually brought forth the idea of ending taxes on tips first, announcing his support for the plan at a campaign rally in Virginia in June. Harris followed with her own plan in mid-August, telling a crowd of Las Vegas supporters — many of them members of the Culinary Workers Union — that she also supports the idea. “When I am president, we will continue our fight for the working families of America, including to raise the minimum wage and eliminate taxes on tips for service and hospitality workers,” Harris said.
What does “no taxes on tips” actually mean, though? And how would it impact restaurant workers? Though it’s unclear exactly how this policy would work in practice — neither Trump nor Harris have outlined specific proposals as of yet — experts say that it wouldn’t have much of an economic benefit. Here’s everything you need to know about how “no taxes on tips” might actually work in practice.
What does “no taxes on tips” actually mean?
This is one of those policy proposals that actually is as simple as it sounds — workers who are paid the tipped minimum wage (also known as the “sub-minimum wage”) of $2.13 per hour would not be required to pay federal income taxes on the tips that they receive from customers. The vast majority of these workers are restaurant servers, bartenders, cocktail waitresses, and other service staff, though the Department of Labor’s definition of a “tipped employee” applies to anyone who receives over $30/month in tips, which extends to drivers and other workers who receive tips.
Who supports “no taxes on tips”?
Both Kamala Harris and Donald Trump have expressed support for the policy, but it’s been simmering among Republican legislators for at least a year. In June, Texas Sen. Ted Cruz introduced the No Taxes on Tips Act, which would fully exempt tips from federal income tax. Rep. Byron Donalds, a Republican from Florida, introduced a similar bill in the House. Both have since been referred to committees. Democrats in Congress have been more skeptical. According to The Hill, Democratic lawmakers felt “blindsided” by the Harris campaign’s support of eliminating taxes on tips, calling the proposal itself “bogus” and Harris’s recent adoption of it a “ploy for votes.”
And on some level, it probably is the latter. Harris is hustling to shore up votes in Nevada, where the 60,000-member strong Culinary Workers Union wields a great deal of political power. The Culinary Workers Union advocates for ending taxes on tips, and met with Harris days before she announced her support of the policy. Trump, too, is looking to shore up votes among union workers in swing states, Nevada among them, and curry favor with voters who support lower taxes in general.
When it was announced, Cruz’s bill also earned the enthusiastic support of the National Restaurant Association, the industry’s largest lobbying group. “Tipped employees are a critical part of the restaurant industry, and anything that strengthens their economic condition is a positive for them,” NRA executive vice president of public affairs Sean Kennedy said in a statement posted to Cruz’s website. “The ‘No Tax on Tips Act’ would provide immediate tax relief for more than 2.2 million restaurant employees and their families, putting more money in their pockets at a time when we’re all feeling the squeeze of higher prices.”
“No taxes on tips” sounds like a good thing! Why is it bad?
It does, in fact, sound like a good thing. And it’s not bad, necessarily, but it likely won’t have much of an impact on the majority of tipped workers. That has everything to do with the way that taxation in this country is structured. According to Vox.com, only about a third of tipped workers earn enough money to pay federal income taxes at all. If your income is less than the “standard deduction” — $27,700 for a married couple filing their taxes jointly — you don’t pay taxes on that income. The median restaurant server earns about $32,000, per the Bureau of Labor Statistics, which means that they would only be required to pay federal income tax on about $4,300 of that income. (Notably, those workers would still have to pay other taxes, like Federal Insurance Contributions Act taxes and state income tax, if their income is high enough.) As such, it’s not likely to have a meaningful impact on the economic burdens of restaurant workers, especially those who earn the least.
When Cruz’s bill was introduced, the Center for American Progress said that “the tax cuts it would provide low- and moderate-wage tipped workers would be small or nonexistent,” and noted that the Act would allow for high earners, like hedge fund managers, to reclassify large portions of their income as nontaxable. Harris’s plan claims to include “guardrails” that would limit the exemption to low-income workers, though still lacks clarity as to what the promised “strict requirements” might be.
What would help restaurant workers economically?
The policy proposal that would have the most immediate impact for workers earning the tipped minimum wage would be to eliminate it altogether, and require that employers pay their workers at least the federal minimum wage of $7.25 per hour. Seven U.S. states — California, Washington, and Alaska among them — have banned the tipped minimum wage, and at least five more are currently considering those policies. States that have eliminated the tipped minimum wage have seen economic growth beyond the restaurant industry, and declines in poverty rates. Harris has expressed vague support for an increase of the minimum wage, but has not yet committed to eliminating the tipped minimum wage. Since at least 2020, Trump has opposed any increase to the minimum wage.
