Former President Donald Trump and Vice President Kamala Harris agree on at least one thing: They both say they want to eliminate federal taxes on workers’ tips.
But experts say there’s a reason Congress hasn’t made that change yet. It would be complicated, not to mention enormously expensive for the federal government, to enact. It would encourage many higher-paid workers to restructure their compensation to classify some of it as “tips” and thus avoid taxes. And in the end, it probably wouldn’t help millions of low-income workers.
“There’s no way it’s not going to be a mess,” said James Hines Jr., professor of law and economics and director of research in the Office of Tax Policy Research at the University of Michigan’s Ross School of Business.
Both candidates revealed their plans in Nevada, a state with one of the highest concentrations of tipped service workers in the country. trump announced a proposal to exclude tips from federal taxes on June 9. Harris announced a similar proposal on August 10th.
Details were scant. Neither candidate team has said whether they would exempt tips from just income taxes, just payroll taxes, or both. The payroll tax funds Social Security and Medicare.
Harris’ campaign said it would work with Congress to write a proposal that would include an income limit and other provisions to prevent abuse by wealthy individuals who might try to structure their compensation to classify certain fees as tips.
His campaign stated that these requirements, which were not specified, would aim to “prevent hedge fund managers and lawyers from structuring their compensation in a way that tries to take advantage of politics.” Trump’s campaign did not say whether his proposal would include such requirements.
Still, Hines suggested that millions of workers — and not just the rich — would seek to change their pay to include tips, and might even do so legally. For example, he said, a company could create a separate entity that would reward its employees with tips instead of year-end bonuses.
“Taxpayers will pressure their lawyers to try to characterize their wages and salary income as tips,” Hines said. “And some would inevitably succeed, because it is impossible to write foolproof rules that cover all situations.”
Trump’s Republican supporters argue that Hines’ concerns are exaggerated. Darin Miller, a spokesman for Sen. Ted Cruz of Texas, said the IRS has a precise definition for tips and argued that reclassifying wages would be considered fraud.
Miller noted that some Democrats have signed on to co-sponsor a bill Cruz introduced in June that would exempt tips from federal income tax. A bill that exempts payroll tips and income tax was also presented in the Chamber.
While supporters say the measures are intended to help low-wage workers, many experts say making tips tax-free would provide only limited help to those workers.
The Yale Budget Lab, a nonpartisan policy research center, estimates that there were 4 million U.S. workers in suggested occupations in 2023. That equated to about 2.5% of all employees, including restaurant workers and beauticians.
Workers who receive tips tend to be younger, with an average age of 31, and with lower incomes. Budget Lab said the average weekly wage for tipped workers in 2023 was $538, compared with about $1,000 for non-tipped workers.
As a result, many tipped workers already face a lower tax burden on their income. In 2022, 37% of tipped workers had incomes low enough to not pay any federal income taxes, The Budget Lab said.
“If the issue is you’re concerned about low-income taxpayers, there are much better ways to address that issue, like expanding the Earned Income Tax Credit or changing tax rates or changing deductions,” Hines said.
In her speech in Nevada, Harris also called for increasing the federal minimum wage. (The platform on the Trump campaign website does not mention the minimum wage.)
Changing federal tax policy on tips would also be expensive. The Committee for a Responsible Federal Budget, a nonpartisan group, estimates that exempting all tip income from federal income and payroll taxes would reduce revenue by $150 billion, to $250 billion, between 2026 and 2035. And he said that amount could increase significantly if policy changed behavior and more people reported income from tips.
Whether Trump or Harris win the presidential election, tax policy will be at the top of Congress’s agenda in 2025. That’s because the Trump-era tax cuts, passed in 2017, are about to expire. But Hines said he believes Congress will not be in a rush to add “great complexity” to the tax code.
“A presidential candidate can say whatever he wants, but it’s the House and the Senate that have to do it,” he said.
