The Great Tipped Income Debate: Unpacking the Pros and Cons
As the presidential election heats up, one issue has taken center stage in Nevada, a crucial swing state: exempting tipped income from federal taxes. Both Donald Trump and Kamala Harris have pledged to eliminate taxes on tips, sparking enthusiasm among tipped workers and prompting bill proposals in Congress. But beneath the surface, experts warn that this policy may not be as straightforward as it seems.
A Small but Vocal Constituency
Tipped workers make up only 2.5% of the US workforce, with roughly four million individuals relying on tips to supplement their income. While this group may be small, they are a sought-after demographic in the election. However, critics argue that the proposed bills would only benefit a fraction of low- and moderate-wage workers, leaving out more than 95% of those who need support.
The Horizontal Equity Problem
Ernie Tedeschi, director of economics at the Yale Budget Lab, points out that the policy creates a fairness issue among low-wage workers. Consider two coworkers, a waitress and a cashier, earning the same annual wage. If the waitress’ tipped income is fully deductible, she’ll receive a refund, while the cashier will owe taxes. “One will potentially get a benefit, and one will not,” Tedeschi notes.
More Than Just a Tax Break
The proposed bills also raise concerns about the subminimum wage for tipped workers. The Fair Labor Standards Act allows employers to take a “tip credit” of $5.12 to bring tipped workers up to the minimum wage. The Culinary Workers Union Local 226, representing 60,000 hotel and restaurant workers in Nevada, endorses Harris’ plan and the TIPS Act, which aims to eliminate the subminimum wage nationwide.
Industry Perspectives
The National Restaurant Association, comprising over a million restaurant and foodservice outlets, initially didn’t have the no-tax-on-tips idea on its agenda. However, after Cruz introduced the No Tax on Tips Act, the association engaged in conversations to ensure tip wages would still be reflected on workers’ W-2s and that payroll taxes would remain intact.
The Fiscal Impact
Estimates suggest that an income tax-only version of the policy would cost $107 billion over 10 years, while a version exempting tips from payroll tax could range from $150 billion to $250 billion. As the next Congress prepares to debate the 2017 Tax Cut and Jobs Act in 2025, the fate of the no-tax-on-tips bills remains uncertain.
A Better Solution?
Some experts argue that alternative solutions, such as expanding the Earned Income Tax Credit or the Child Tax Credit, would be more effective in helping working-class workers. As the debate continues, one thing is clear: the path to reforming tipped income taxation is fraught with complexities and uncertainties.
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