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It turns out presidential candidates Kamala Harris and Donald Trump agree on one thing: tips shouldn’t be subject to federal income tax. But this seemingly worker-friendly change (which would likely require Congressional approval) could have significant unintended consequences.
First, the Committee for a Responsible Federal Budget, a nonpartisan nonprofit, reported that Harris’ plan could increase the federal budget deficit by $100 billion to $200 billion over the next decade. The same organization rates Trump’s plan even worse, estimating that it could increase the deficit by $150 billion to $250 billion over the next decade. Taxes and fees are like whack-a-mole: when one falls, others pop up.
Americans are tired of tipping
I worry that these plans will make American workers even more dependent on tipping at a time when many customers are weary of the practice. According to a recent Bankrate survey, nearly six in ten U.S. adults (59%) hold at least one negative view of tipping. This includes 37% who think companies should pay their employees more instead of relying so much on tips, 35% who think tipping culture is getting out of control, and 34% who are weary of pre-entered tip screens (which have become common in coffee shops, food trucks, etc.).
Eliminating the tip tax could make the situation worse. It certainly wouldn’t encourage companies to pay their employees more. In fact, it’s easy to imagine employers classifying more employees as “tipped workers” under the guise of a “no tip tax” policy. With the federal tipped minimum wage at just $2.13 per hour (unchanged since 1991), that could create a precarious situation.
Some states have raised the minimum wage for tipped workers, but it is becoming increasingly difficult to survive on tips alone, and after a brief surge in support for service workers amid the coronavirus pandemic in 2020, Americans have been tipping much less frequently since then.
- For example, in 2021, 75% of people who dine sit-down at a restaurant always tipped. Now it’s 67%.
- In 2021, 63% of people always tipped their barbers and hairdressers. That number dropped to 55%.
- In 2021, 59% of people always tipped for food delivery, but now it’s 51%.
- In 2021, 48% always tipped their taxi/rideshare drivers, compared to 41% now.
Generational differences are especially stark: Only 35% of Gen Zers (ages 18-27) who visit sit-down restaurants always tip; that number rises to a still-low 56% for millennials (ages 28-43). Tipping is more prevalent among Gen Xers (78% of 44-59 year-olds always tip at sit-down restaurants) and Baby Boomers (ages 60-78, 86% always tip when visiting a sit-down restaurant). Younger adults in particular tip so infrequently that working-class employees may be better off relying less on tips.
Do the rich have an advantage?
Highly paid professionals might try to take advantage of tax-free tips. Could executives’ multi-million dollar bonuses be classified as tips and avoid federal taxes? At scale, that would add significantly to the budget deficit and not help the blue-collar individuals this idea is supposed to help. Vice President Harris has indicated she wants to put an income limit on tax-free tips, but former President Trump’s plan is less clear.
Additionally, many tipped workers do not pay taxes.
Cash tips are notoriously under-reported, but the growing use of credit and debit cards has led to more documentation being provided to the IRS. Still, “37% of workers who receive tips earned so little that they would not be subject to federal income tax in 2022, even before taking into account the tax credit,” the Yale Budget Institute said.
Working without a safety net
Employees and independent contractors who rely heavily on tips are at the whims of their customers. If business is slow or customers are stingy, they earn less. These types of workers are also less likely to have paid time off, health benefits, 401(k) contributions, and other perks. Take gig workers, for example. Being your own boss and setting your own hours sounds good, but the lack of a safety net means uncertainty.
Conclusion
Eliminating the federal tax on tips is a provocative campaign issue — it’s no coincidence that both candidates announced it in tourism-rich Nevada — but it’s lacking substance. To truly improve workers’ lives, politicians should focus on raising wages and benefits, rather than further reinforcing an already unpopular tip-heavy culture.
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