Experts skeptical of Trump’s promise to eliminate tip taxes • Nevada Current
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Experts skeptical of Trump’s promise to eliminate tip taxes • Nevada Current

WASHINGTON – Economists across the ideological spectrum have expressed doubts about the cost and feasibility of former President Donald Trump’s proposal over the weekend to exempt tips from federal taxes if he wins in November.

At a Sunday campaign rally in Las Vegas, where hundreds of thousands of people work in the hospitality industry, Trump promised service workers that they would no longer have to pay federal taxes on tip income if the presumptive GOP nominee wins a second term.

The roughly 6 million tipped workers in the U.S. represent a tiny fraction of the country’s 150 million taxpayers, the most recent data available for 2018, but campaigns for tax cuts for certain demographic groups are becoming an increasingly important issue ahead of the November presidential election.

“I’m saying this for the first time and those who work in hotels and people who receive tips will be very happy because when I get into office, we will not be collecting taxes on tips, on people who tip,” Trump said to cheers at the rally.

Trump said he would “do it right away, the first moment he takes office,” although changing the tax code would require an act of Congress.

The tax code needs updating

Much of the sweeping 2017 tax bill, passed by Congress along party lines during the Trump administration, is set to expire at the end of 2025, and lawmakers and advocates are already setting their priorities.

According to the latest data from the Internal Revenue Service, tipped workers earned an average of $6,000 on top of their base wages in 2018 and collectively paid about $38 billion in tip taxes. In 2018, the IRS collected a total of approximately $7 trillion in taxes.

“In terms of the macroeconomic impact, it is quite small,” said Erica York, senior economist and research director at the right-leaning Tax Foundation.

“If you think about it in the context of what Congress will be debating next year, one of the biggest challenges lawmakers will face is the impact on revenues. Every dollar of tax revenue resulting from one type of tax cut is $1 less from another type of tax cut. So this will be a real exercise in prioritizing the trade-offs across policies,” York said.

Trump has promised to extend all tax cuts enacted under his administration, but the cost of extending them over the next decade will be $4.6 trillion, according to estimates from the Joint Committee on Taxation and the nonpartisan Congressional Budget Office.

Trump’s tipping proposal for workers “smells more like campaign politics than a truly thoughtful and principled tax policy proposal,” York added. “And I think the elephant in the room for both candidates is that they haven’t fully addressed what are you going to do about these massive lapses scheduled for next year?”

The Trump campaign did not respond to requests for further details.

Motivating you to work with tips

Andrew Lautz, deputy director of the Bipartisan Policy Center, said that while tipped workers represent a “small slice” of the tax base, “you’re talking about potentially a large portion of income that you’re giving up every year” depending on how the policy is implemented.

“Our current tax system is certainly not designed to treat all income equally, but if this proposal were implemented, it would in some sense add a new category of income that is not taxable,” Lautz said. “And you know what economic theory says, all other things being equal, making this change would encourage people to receive tips that are not taxed under this proposal compared to their regular wage income.”

He added that there was also the possibility of “abuse”.

“If Donald Trump becomes president again next year, and even if he doesn’t, but this proposal kind of piques the interest of policymakers in Congress, it’s very likely that it will be on the table,” Lautz added.

Janet Holtzblatt, a senior fellow at the left-leaning Tax Policy Center run by the Urban Institute and the Brookings Institution, said Trump’s proposal to eliminate tip taxes is “extraordinary.”

“Because tips replace the wages that the rest of us receive, and if you don’t tax tips, you basically don’t tax (on) tipped workers’ wages, which makes it a tax benefit on their earnings. Those of us who don’t work in tipped industries wouldn’t get the same tax benefits, Holtzblatt said.

Minimum wage

Wage laws in several locations allow employers to pay service workers hourly wages well below the federal minimum wage.

Holtzblatt said the “solution” is for local governments to raise the minimum wage for service workers for a number of reasons.

“Tips are not always a predictable form of income,” she said. “There are many differences, the tips a waiter receives in a top-class restaurant will be very different from the tips a person receives in a restaurant.”

President Joe Biden’s re-election campaign responded to Trump’s “wild campaign promise” by stating that Biden supports raising the minimum wage and eliminating the tipped minimum wage, which is a “significantly larger undertaking” than Trump’s proposal, a campaign spokesman wrote in an email Monday to States Newsroom.

Ted Pappageorge, secretary-treasurer of Culinary Workers Union Local 226, which has 60,000 members in Las Vegas and Reno, Nevada, said the organization has “fought for the rights of tipped workers and against unfair taxation” for decades.

“Relief is definitely needed for tip earners,” Pappageorge said in a statement over the weekend. “But Nevada workers are smart enough to know the difference between real solutions and crazy campaign promises made by a convicted felon.”