One of the more novel proposals in Donald Trump’s economic plan sprang from a conversation between the Republican presidential candidate and a server at a restaurant in Nevada.
The waitress complained that tax officials were “after [her] all the time on tips, tips, tips”, Trump told a rapturous audience at the Republican National Convention in Milwaukee on Thursday night.
“I said, ‘Let me just ask you a question, would you be happy if you had no tax on tips?’ She said, ‘What a great idea,” Trump continued. “No tax on tips!” the crowd chanted back at the former president.
The idea, first floated in a campaign speech last month, has become a go-to slogan for Republican campaigners, in a bid to win the support of workers in the service industry. Here is a look at how it would work and who could benefit.
How would it work?
Eliminating federal taxes on gratuities would “significantly reduce tax liability” for 6mn workers who earn tips — including restaurant servers, baristas, taxi drivers, bartenders and hair stylists, said Andrew Lautz of the Bipartisan Policy Center.
Across the US tips can range in amount from a dollar or two for a cup of coffee to a 15-20 per cent — or higher — gratuity for sit-down meals. Tipped workers reported earning an average of $6,000 in gratuities apiece in 2018, the last year for which Internal Revenue Service data is available.
Employees receiving $20 or more a month in tips are required to report those to their employers and tax authorities. Those tips are subject to both federal payroll and income taxes under the current tax code.
Only Congress could eliminate one or both of those taxes, and Trump has not provided details of how his plan would work.
One bill introduced by Republican lawmakers proposes to exempt tips from only federal income tax. Employers would still be required to withhold payroll taxes on them, and they would still be subject to any applicable state taxes.
How would it help workers?
Minimum wage laws allow tipped workers to be paid as little as $2.13 an hour with the expectation that tips will bring their total earnings up to at least the threshold of $7.25 for other workers. Eliminating taxes on tips would presumably leave more cash in their pockets, essentially allowing tipped workers to take a tax deduction equal to the amount of their tipped income.
Workers’ advocates say service staff have struggled to make ends meet since 2020, when many lost their jobs during Covid lockdowns. Workers were in short supply when restaurants and bars reopened in 2021, prompting large raises, signing bonuses and other perks.
Conditions largely remained the same however, frustrating workers, according to Ben Reynolds, a union organiser with independent labour union Restaurant Workers United, which represents employees in four states.
Wage growth for leisure and hospitality jobs peaked last year at a 12-month moving average of 7.2 per cent in January 2023, above the average of 6.3 per cent for workers overall.
Tax policy experts point out that exempting tip income would not help the majority of low-wage workers, although it would present opportunities for people to game the system by asking to be paid in tips instead of with a traditional salary. Out of the lowest paid quartile of wage earners in the US — those earning less than $17.66 hourly — only 5 per cent receive tips, according to an analysis by Yale University’s Budget Lab.
“Working in a grocery store you make the same total compensation [as a server], but all of their income is subject to taxation because they don’t receive tips,” said Lautz at the Bipartisan Policy Center. “There’s a fairness concern there.”
What would it cost?
Cutting taxes on gratuities would have a “relatively small impact on the big picture” because tipped workers were a small portion of the US tax base, said Erica York, senior economist at the Tax Foundation, a right-leaning think-tank. Yale’s Budget Lab estimates that tipped workers comprise just 2.5 per cent of the US labour force.
An estimate by the Committee for a Responsible Federal Budget found that it would reduce federal revenues by a minimum of $150bn-$250bn over 10 years — although that figure could rise if more workers start getting paid in tips.
The proposal would still add to the government’s projected $22tn deficit over the next decade, York warned. It also comes ahead of a legislative battle over the expiration of Trump’s 2017 Tax Cuts and Jobs Act that could result in new reductions that further reduce federal revenues.
What are the political considerations?
Tipped workers are a crucial voting bloc in Nevada, one of seven swing states that will decide the presidential election, and reducing taxes has long been at the core of Republicans’ economic pitch to voters.
But the idea has also gained some bipartisan traction. Nevada’s senators, Jacky Rosen and Catherine Cortez Masto, are the first Democrats to support the proposal. They said in a statement that it would provide economic relief to the states’ middle-class families.
US President Joe Biden previously suggested eliminating the lower minimum hourly wage for tipped workers, forcing employers to pay them full wages in addition to the tips they receive.
Workers would probably welcome the tax cut, but some might have preferred other reforms to the industry such as consistent shift scheduling, said Reynolds of Restaurant Workers United.
While it may not win over every restaurant worker concerned about making ends meet, the Republican proposal has become a catchy marketing tool. Trump’s campaign has asked supporters to appeal to service workers by writing a message beside the tip line on their receipts until election day: “vote for Trump for no tax on tips!”
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