Experts Explain Why 'No Taxes on Tips' Is Not What Tipped Workers Need

An ostensibly pro-worker policy proposal embraced by the presidential nominees of both the Republican and Democratic parties could actually be detrimental to the U.S. working class, potentially undercutting efforts to abolish subminimum wages and lift the long-stagnant federal pay floor while creating more ways for the rich to dodge taxes.

The proposal in question is exempting tips from federal income taxes, an idea that former President Donald Trump endorsed in June in a bid to win over hospitality and hotel workers. Vice President Kamala Harris backed the proposal weeks later, drawing "copycat" allegations from Trump. Unlike Trump, Harris also expressed support for increasing the federal minimum wage while outlining ways to prevent rich Americans from reclassifying their income as tips to avoid taxation.

But economists have argued in recent days that while it appears sensible and obviously pro-worker on its face, ending taxes on tips is not a meaningful solution to starvation wages and could ultimately harm low-paid employees.

"For starters, tip workers make up a small fraction of the U.S. workforce—about 2.5%—and more than one-third of them do not even earn enough to pay income taxes in the first place," Sylvia Allegretto, a senior economist at the Center for Economic Policy and Research, wrote for The Progressive magazine earlier this week.

"Cutting the federal tax does nothing for this group, except reduce the amount that they contribute to Social Security. Some of these workers could also lose out on other vital programs, like the Earned Income Tax Credit," Allegretto wrote, dismissing the "no taxes on tips" proposal as a "gimmick."

Allegretto also warned that "without adequate safeguards, some high earners would simply reclassify a portion of their income as tips," creating "one more avenue for the wealthy to avoid paying their fair share."

"There are plenty of policies that would improve the lives of low-wage workers—raising the federal minimum wage, for starters, and ending the subminimum wage for tipped workers is a good place to start," she argued.

"You're not hearing Trump or any Republicans talk about [raising the minimum wage], and they probably won't, but it's a big piece of the picture."

Other experts and advocates have similarly warned that the push to exempt tips from federal taxes is little more than a distraction from broader, desperately needed policy solutions for workers struggling with low wages, badly inadequate or nonexistent benefits, and a lack of on-the-job representation.

"The good news is that lawmakers have designed way better ways of helping working families... from eliminating the subminimum wage that allows workers who receive tips to be paid a paltry $2.13 an hour, to raising all minimum wages above the $7.25 where it has been mired for a decade and a half, to making it easier for workers to unionize," Joe Hughes, a senior policy analyst at the Institute on Taxation and Economic Policy, wrote in a blog post last week.

"In terms of tax solutions," Hughes added, "lawmakers rightfully concerned about low-wage workers should instead consider expanding the Child Tax Credit and Earned Income Tax Credit (and especially making the latter stronger for workers without children in the home)."

Rev. Dr. William J. Barber, co-chair of the Poor People's Campaign, emphasized in an interview with The Guardian this week that Trump can't be trusted to pursue a genuinely pro-worker agenda.

"[Trump] can say it all he wants. He had four years to do it and he didn't do it," Barber said of eliminating federal taxes on tips. "But what he did do was give greedy people a $2 trillion tip through tax cuts."

Despite critiques of the proposal, Culinary Union Local 226—which represents tens of thousands of hotel workers in Las Vegas—has backed the push to exempt tips from federal taxation while acknowledging that wage increases are also necessary.

"It's like two sides to the same coin," Ted Pappageorge, the union's secretary-treasurer, toldFortune earlier this week. "You're not hearing Trump or any Republicans talk about [raising the minimum wage], and they probably won't, but it's a big piece of the picture."

Days after Trump endorsed exempting tips from federal taxes, a trio of Senate Republicans led by Sen. Ted Cruz (R-Texas) introduced the No Tax on Tips Act, legislation that would allow "taxpayers to claim a 100% deduction at filing for tipped wages."

The bill was backed by the National Restaurant Association, an organization that was exposed last year for using workers' money to finance lobbying campaigns against wage increases.

Brendan Duke, senior director of economic policy at the Center for American Progress, observed last month that the No Tax on Tips Act "contains few, if any, guardrails to prevent employees or business owners from recharacterizing income they receive as wages or business profits as tips."

"If hedge fund managers, lawyers, and other highly paid professionals can find ways to restructure compensation as tipped income given the lack of guardrails in Sen. Cruz’s bill," Duke wrote, "they could enjoy a serious tax windfall."