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Will Trump's Las Vegas idea to end taxation on tips catch on?

Economists cautioned the policy could have adverse effects on tip earners.
Gabby Birenbaum
Gabby Birenbaum
EconomyElection 2024Elections

When former President Donald Trump held a rally in Las Vegas in mid-June, he pledged to end federal taxation of tips.

“Hotel workers and people that get tips, you’re going to be very happy because when I get to office, we are going to not charge taxes on tips,” he said. “We’re going to do that right away, first thing in office.”

Such a policy would require an act of Congress. But the idea and the venue where he proposed it had strategic merit. A critical swing state, Nevada is home to more than 350,000 workers in the hospitality industry, including waiters, bartenders and cocktail servers.

The union that represents hospitality workers, the mighty Democrat-aligned Culinary Workers Union Local 226, immediately panned the proposal. 

“This is what we call a wild-ass campaign promise,” Culinary Union secretary-treasurer Ted Pappageorge said in an interview. “Trump is really pulling it out of you know where.”

Although attracting the support of union leadership was always a near impossibility, the Trump campaign is hoping rank-and-file workers hear the message. His surrogates, including Rep. Marjorie Taylor Greene (R-GA) and Nevada GOP chairman Michael McDonald, have posted photos of recent receipts, writing “Vote Trump — no tax on tips.”

The seriousness of the proposal is yet to be determined — Trump, of course, rewrote much of the tax code through his signature 2017 Tax Cuts and Jobs Act, which did not include tax relief for tipped workers. With those tax cuts expiring next year, 2025 would serve as an opportunity for Congress to work on such a proposal.

Rep. Richie Neal (D-MA), the top Democrat on the powerful Ways & Means Committee, which writes taxes, said raising the minimum wage would be the most efficient way to help workers — and that he suspected Trump’s proposal was motivated by politics rather than seriousness about tax policy.

“Sounds to me like it’s a Nevada issue for him,” Neal said. “I think it’s the Electoral College that’s at work here.”

Congressional Republicans across the ideological spectrum have championed Trump’s trial balloon. In the House, far-right Reps. Matt Gaetz (R-FL) and Thomas Massie (R-KY) introduced a bill to end federal income and employment taxes on tips. Meanwhile in the Senate, Sens. Steve Daines (R-MT) and Ted Cruz (R-TX) introduced similar legislation, with Daines, the chairman of the National Republican Senatorial Committee, heralding the idea as a “stroke of genius” to appeal to working-class voters.

And though Democrats have written off Trump as a serious policymaker — and are quick to remind voters the Trump tax cuts lowered rates on billionaires and corporations — some have expressed openness to the idea.

“Are taxes going away on tips?” Pappageorge said. “That'll never happen. But is it a starting point to get some pressure and maybe some sort of relief for tip earners. We would support that.”

Inside the policy

Without any policy to offset the loss of revenue, the nonpartisan Committee for a Responsible Budget estimates the policy could blow a $150 billion to $250 billion hole in the federal deficit over 10 years.

That alone causes some lawmakers hesitation. Rep. Mark Amodei (R-NV) said it’s a “great idea,” but he would need more clarity on whether it would be structured as an outright tax cut or include an offsetting revenue raiser.

“I like it,” Amodei said. “We just have to make sure that when it comes to [the deficit], what do you do for that revenue?”

Although tipped workers have fought for fair wages, experts cautioned that ending taxation on tips might not be as beneficial to workers as it seems upon first glance. 

Currently, workers pay federal income and payroll tax on tips. But many tipped wage earners do not earn enough to meet the threshold for owing federal income tax. The Bureau of Labor Statistics reports that 50 percent of waiters earn less than $32,000 annually — exempting the vast majority from owing federal income tax. 

Jeff Waddoups, a labor economist at UNLV, projected that only the highest-earning hospitality workers — such as waiters at high-end restaurants — would receive tax relief.

“Why advantage the workers who are more highly paid already?” Waddoups said. “What about all those workers who are in the same industry, working in the same firms, but don't make tips, or don't get paid by tips?”

Waddoups also said that if implemented, the policy could indirectly depress wages.

Nevada is one of just seven states that requires employers to pay their tipped workers the full minimum wage — $12 per hour — rather than a subminimum wage that workers theoretically make up via tips. If the Internal Revenue Service (IRS) were to stop taxing tips, Nevada employers could not set a lower subminimum wage, as employers would be able to do in other states, figuring employees could make up the difference through lack of taxation.

But companies could withhold or diminish pay raises. In the hospitality industry, labor costs are paid by a combination of the employers, via salary, and the consumers, via tips. It’s a delicate balance — as digital tipping replaced cash in most cases post-pandemic, consumers have reported increasing frustration with the frequency and amount they are expected to tip. 

If tips go untaxed while salary is taxed, companies could be incentivized against raising pay, Waddoups said.

“Firms use their pay to attract workers,” he said. “If they have a situation where suddenly this group of workers’ tax is lowered, and take-home pay increases, it might just give them an incentive to fight harder against pay raises — ‘they’re not having to pay as much in taxes, so we just won’t raise their hourly rate as much as inflation.’”

An analysis from the nonpartisan Tax Policy Center came to the same conclusion — companies would be incentivized to game the tax system and consumers could decrease their tip amount.

“If the consumer knows the tips are not taxed, do they lower the tip?” UNLV economist Stephen Miller asked.

Additionally, the Tax Policy Center cautioned that ending taxes on tips could serve to undercut other efforts to improve hospitality workers’ standard of living, including the movement to raise the federal minimum wage.

Waddoups agreed, saying the simplest way to increase tipped workers’ income would be to raise the minimum wage, rather than decrease their tax burden. 

Rep. Susie Lee (D-NV) said in an interview that she supported the policy but did not trust Trump to follow through. When asked if she was worried about companies suppressing wages, Lee followed up with a statement saying “ending taxes on tips should not be used as an excuse for employers to cut wages.”

Inside the politics

Republicans are hoping Trump’s trial balloon can make a difference in states such as Nevada, where tipped workers are a critical voting bloc. U.S. Senate candidate Sam Brown has embraced ending taxes on tipped workers, telling NBC News in June that he had planned to roll out a similar policy and that the former president “scooped” him.

Trump claimed he got the idea from a waiter in Las Vegas, reportedly asking her what it would take to win her vote.

In 2020, President Joe Biden won the vote from workers whose income was lower than $50,000 by a 16-point margin in Nevada — a deficit Trump will need to cut into to win the state this time around.

On the Hill, Republicans think the policy represents a strong appeal.

“Workers heavily support it,” said Rep. Greg Steube (R-FL), who sits on the Ways & Means Committee. “So I think it’s a great idea.” 

Most tipped workers in Southern Nevada — whom Trump is hoping the policy appeals to — are represented by a union. The Culinary Union, 60,000 members strong, has delivered the swing state to Democrats in past elections through powerful canvassing efforts and voting might. That number was even stronger among union households, whom Biden won by 19 percentage points.

Democrats — and Culinary itself — believe the traditional alliance between the party and organized labor, in addition to Trump’s well-established record on taxes, can blunt any appeal the policy might have. 

“Folks need relief,” Pappageorge said. “They need fairness. But they're not stupid.” 

And it’s not as if the left has no ideas for workers — House Democrats have passed bills to gradually increase the federal minimum wage to $15 per hour and protect workers’ rights to organize by beefing up union protections, and have proposed ending the subminimum wage.

“Donald Trump only cares about himself,” Rep. Steven Horsford said. “He said that — ‘I don’t care about you, I only care about your vote.’ And people can donate billions of dollars to [Trump’s] campaign and to the House Republicans because they just want to focus on tax breaks for the wealthy and not the average person.”

Horsford does favor tax relief for tipped workers through readjusting the tip allocation rate formula, which increased by more than 50 percent between 2020 and 2022.

Pappageorge said he hopes the proposal — regardless of the messenger — can lead to discussions on adjusting the tip allocation rate, which Culinary protested when the IRS raised it in 2022 and worked with Democrats including Horsford to negotiate with the agency. He said the union’s top priority for upcoming tax negotiations is ensuring they have a seat at the table to fix logistical IRS issues, including those related to the tip allocation rate.

Similarly, Sen. Catherine Cortez Masto (D-NV) said in a statement that she supports cutting tipped workers’ taxes and pointed out other opportunities, including expanding the Earned Income Tax Credit and Child Tax Credit. Like Horsford, she said Trump “will say anything to get elected” and is untrustworthy.

Pappageorge said he believes Trump is throwing ideas at the wall and is unserious. He‘s also worried the former president was giving credence to the stereotype that tip earners are tax cheats. But he said he wants tax relief for tip earners to get more attention. 

“We’re willing to jump in the water with Trump,” he said. “This is a kitchen table issue for tip earners — the idea of fairness.”


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