Donald Trump and Kamala Harris each pledged while campaigning in Las Vegas to eliminate taxes on service workers’ tips. Both figures, the former President and the current Vice President, expressed a desire to relieve tipped workers of this financial burden. However, an expert in law and economics cautions that such promises might be more complex to fulfill than they appear.
In Nevada, known for having the highest concentration of tipped workers in the United States, the tax-free tip pledges struck a chord. Yet, James Hines Jr., a law and economics professor at the University of Michigan and research director of the Ross School of Business Office of Tax Policy Research, expressed skepticism. He emphasized that any alteration in how service workers are taxed would require Congressional action and would introduce significant complications for the IRS.
Hines highlighted the potential ramifications, pointing out that exempting tips from taxes could encourage workers and employers to reclassify wages as tips, thereby reducing taxable income. Scenarios could emerge where a contractor might adjust a $2,000 service bill to reflect $1,000 for the job and $1,000 as a mandatory gratuity. Similarly, employers might reclassify annual bonuses as tips to decrease payroll tax obligations, allowing workers to retain more income.
Hines underscored the difficulty in legislating foolproof rules that could prevent such reclassification attempts. Fiscal projections suggest that eliminating tip taxes could deprive the federal government of up to $25 billion annually. Hines argued that this change would likely advantage wealthier individuals rather than the low-income workers Harris and Trump aim to support.
Erica York, a senior economist and research director at the Tax Foundation, concurred, labeling the proposal as “good politics but bad policy.”
Currently, there are approximately four million tipped workers in the U.S., representing about 2.5% of the national labor force. Despite shared goals between the Republican and Democratic presidential candidates, the Culinary Union in Las Vegas has thrown its support behind Harris. Culinary Union Secretary-Treasurer Ted Pappageorge differentiated between the candidates’ promises. When Trump initially made his pledge in June, Pappageorge dismissed it as a campaign promise from a “convicted felon,” yet he praised Harris for acknowledging the contributions of hospitality industry workers when she issued a similar promise.
As of now, Harris and Trump are neck and neck in the political betting exchange Polymarket, underscoring the competitive nature of this policy discussion and its potential impact on their electoral prospects.
