How a president without a tax on tipped income would impact minimum-wage workers and the U.S. economy.

• According to polling, Nevada is one of the tightest swing state races in the presidential election.
• Both Donald Trump and Kamala Harris have proposed no-tax-on-tips plans to attract the Vegas-based workforce, which has the highest percentage of restaurant, hotel, and casino employees in the country.
• In 1997, Texas GOP House member Ron Paul first proposed a tax break that, if enacted, could have a limited payoff for a small portion of the nation's low-wage workforce, but with a minimal overall fiscal impact, could be pursued on Capitol Hill by either candidate.

Nevada is a swing state in the presidential election, with polls showing a close race between Donald Trump and Kamala Harris. The state has been a focal point for both candidates to advocate for excluding tipped income from taxes.

In June, Donald Trump, the Republican presidential candidate and former president, pledged to eliminate federal taxes on tipped income to his supporters in Las Vegas, a city with a high proportion of restaurant, hotel, and casino workers. Two months later, Kamala Harris, the Democratic opponent, made a similar promise to her Vegas audience.

In a swing state, tipped workers, a valuable group of voters, were excited about the possibility of receiving more money. The campaigns made promises that led to related but differing legislation proposals in the Senate and House. A concept that was previously unsuccessful, first proposed by Texas GOP House member Ron Paul in 1997 and later revived by a few other legislators, appeared to be gaining momentum.

Some economists, tax experts, and restaurant union and industry officials are not as optimistic about the latest iterations as the marketing slogan "What happens in Vegas, stays in Vegas" suggests.

The policy would only affect a small number of people, as there were only about four million tipped workers in the U.S. in 2023, which is just 2.5% of the total workforce. This includes restaurant servers, bartenders, barbers, taxi and rideshare drivers, and hairdressers, according to the Yale Budget Lab, a non-partisan policy research center.

Among workers earning less than $25 per hour, less than 5% receive tips. Specifically, among the nearly 2.2 million servers and bartenders, half earned a mean annual wage of $36,530 last year, or $17.56 an hour, according to the Bureau of Labor Statistics.

The proposed bills exclude more than 95% of low- and moderate-wage workers, according to Ernie Tedeschi, director of economics at the Yale Budget Lab.

He pointed out that fairness, or horizontal equity, is a challenge even for low-wage workers in similar jobs.

Uneven tax break benefits

If a waitress at a quick-serve restaurant earns $34,000 annually, with $19,000 coming from tips, and her co-worker, a cashier, earns the same amount in hourly wages, the waitress's tipped income being 100% deductible, and her taking the IRS 2024 standard deduction of $14,600, she will receive a $1,656 refund. Meanwhile, the cashier will only be entitled to the standard deduction and will owe Uncle Sam $2,096.

"While one may receive a benefit and the other won't, both are low-wage workers and therefore deserve it. However, there are other low-wage workers outside of food service, such as home health workers and custodians, who will never receive any benefits from this."

In 2022, 37% of tipped workers had incomes low enough to avoid federal income tax, according to Tedeschi. Additionally, many of them qualify for other forms of tax relief, such as the Earned Income Tax Credit and the Child Tax Credit, which can eliminate any federal income tax liability.

The proposed legislation includes three bills: the No Tax on Tips Act, the Tax-Free Tips Act of 2024, and the companion House bill offered by Rep. Byron Donalds. These bills aim to provide different tax treatment for cash tip income. The No Tax on Tips Act allows workers to claim a 100% above-the-line deduction for cash tip income, while the Tax-Free Tips Act exempts tips from both income and payroll taxes. Under all three bills, employees and employers would still owe a 7.65% payroll tax on tipped income.

The GOP bills lack safeguards that may enable high-income earners, such as hedge fund managers, lawyers, and accountants, to exploit the system and obtain a tax advantage. According to an analysis by the Center for American Progress, highly paid professionals may be able to discover ways to restructure their wages, bonuses, or even profits as tips, as per the No Tax on Tips Act. For example, a married couple earning $1 million in wages who converts half of their compensation into tips would receive a $180,000 tax cut.

Alex Muresianu, a senior policy analyst at the Tax Foundation, stated that tips should be voluntary. He suggested that tipping customs could be introduced in marginal service jobs. An auto-body shop or a housing contractor might start setting lower prices and asking for tips. Without guidelines, enforcing such reclassification could be challenging for the IRS.

Rep. Steven Horsford (D-Nevada) submitted the Tipped Income Protection and Support (TIPS) Act, which aims to eliminate the subminimum wage for tipped workers and exempt tips from federal income tax up to a threshold of $75,000.

Taking a minimum-wage worker tax battle to Capitol Hill

The federal minimum wage is $7.25 per hour and $2.13 for tipped workers who receive more than $30 a month in tips. Employers can take a tip credit of $5.12 to bring tipped workers up to at least the minimum wage. Many states have established a higher minimum wage, with seven states, including Nevada, abolishing the subminimum wage. The TIPS Act aims to exclude the subminimum wage nationwide and increase the minimum wage.

The Culinary Workers Union Local 226, representing 60,000 hotel and restaurant workers in Nevada, was skeptical of Trump's proposal and Cruz's bill because they did not address the minimum wage. However, the union has endorsed Harris' plan and the TIPS Act. According to Ted Pappageorge, the union's secretary-treasurer, "There are two sides to the same coin" when it comes to no tax on tips and going after the subminimum wage. He stated that tip earners are willing to pay their fair share, but there has been an overreach by the IRS.

The National Restaurant Association, with over a million restaurant and foodservice outlets and 15.5 million employees, did not have the idea of no tax on tips on its comprehensive tax agenda before Trump's announcement. However, once Cruz brought it up, the association had several good conversations with him about the specific lines the restaurant industry wanted to see in legislation.

The association advocated for tip wages to be reflected on workers' W-2s, even though they are tax exempt, in order to enable them to qualify for loans and credit. Additionally, the association lobbied to maintain payroll taxes, ensuring workers continued to contribute to the Social Security Trust Fund for their retirement, according to Kennedy. "This is a complex issue, and it will take a lot of ongoing thought and deliberation by Congress to get it right."

Kennedy stated that while he supports the TIPS Act's provision of ending taxes on tips, he strongly opposes the elimination of the tip credit and the subminimum wage for tipped workers. He emphasized that most servers earn more than the minimum wage due to the tip credit.

Kennedy stated that while he is ready for a real conversation on the future of the federal minimum wage, he has a caveat based on restaurants' labor costs, which have fluctuated since 2018. He explained that if the solution is to simply increase the minimum wage and everyone will either succeed or fail, many restaurants will struggle, leading to opposition to a simple increase in minimum wage.

The question is how much a federal tax cut will decrease the Treasury's reserves. The Yale Budget Lab estimates that an income tax-only version would cost $107 billion over 10 years, but about $62 billion with worker restrictions in place. The non-partisan Committee for a Responsible Federal Budget calculates a range between $150 billion and $250 billion for a version that also exempts tips from payroll tax.

In 2025, the next Congress will debate the 2017 Tax Cut and Jobs Act, which includes provisions that will expire, such as the standard deduction, individual tax rates, and the child tax credit, all of which will affect a significant portion of the workforce. It is uncertain whether the no-tax-on-tips bills will be included in the debate.

"Kennedy stated that it is too early to determine the outcome, as both the White House and Congress are still in play. However, he added that they anticipate a Trump administration prioritizing this issue."

If Harris wins, restaurant union rep Pappageorge believes that there is a chance of this happening.

Tedeschi believes that out of all the policy proposals in the 2024 campaign, this one is the most likely to be implemented.

Muresianu suggests alternative solutions for aiding working-class workers, such as expanding the EITC or the CTC, or increasing the standard deduction, rather than a no-tax on tips.