Trump and Harris both want no taxes on tips. Here’s why policy experts don’t like the idea

Former President Donald Trump and Vice President Kamala Harris both want to end taxes on tips — and some policy experts have already criticized the idea.

Harris expressed support for tax-free tips at a rally on Saturday in Las Vegas. Her comments come roughly two months after Trump shared a similar idea, also at a rally in the service economy hotbed.

Nevada is a key battleground state where the hospitality sector accounts for roughly one-quarter of the workforce, according to the state’s June employment data.

“It is my promise to everyone here, when I am president, we will continue to fight for working families, including to raise the minimum wage and eliminate taxes on tips for service and hospitality workers,” Harris said at her rally.

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In 2023, there were roughly 4 million U.S. workers in tipped occupations, representing 2.5% of all employment, according to estimates from The Budget Lab at Yale University.

Generally, tipped workers are lower-income individuals, and some 37% weren’t subject to federal income tax in 2022, the report found. As a rule, employed workers who make less than their standard deduction don’t owe federal income taxes.

Not taxing tips is “a fairly narrowly targeted tax exemption,” said Garrett Watson, senior policy analyst and modeling manager at the Tax Foundation.

Still, the idea has some bipartisan support in Congress with a bill introduced in the Senate in July and a House companion bill.

Despite support for no tax on tips from Harris and Trump, some experts have voiced concerns about future plans. 

Experts consider equity, efficiency and revenue when weighing policy, explained Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center. “The striking thing about this proposal is it fails every score that you might make for tax policy.”

If enacted, the idea could face administrative hurdles and possible abuse, experts say. For example, some workers could try to reclassify wages as tips to avoid the tax.

After Harris’ weekend comments, a campaign official told CNBC that, if elected, Harris would work with Congress to enact a law with an income limit and requirements to prevent “hedge fund managers and lawyers from structuring their compensation in ways to try to take advantage of the policy.”

Trump’s campaign did not respond to CNBC’s request for comment.

The idea of not taxing tips could also present a fairness issue for similar low-income workers who don’t earn tips, Rosenthal said.

“Why should someone whose compensation is a mix of tips and wages be better off after taxes than somebody who just gets wages?” he added.

There are also critiques about the cost of the idea, particularly amid concerns about the federal budget deficit.

At Saturday’s rally, Harris called for no tax on tips and a higher minimum wage. The two ideas could collectively raise the deficit by $100 billion to $200 billion over 10 years, assuming the minimum wage increased from $7.25 to $15 per hour, according to an estimate from the Committee for a Responsible Federal Budget.

It’s unclear whether Harris’ and Trump’s plans would include an exemption from payroll taxes or just federal income taxes, which could impact revenue.

The cost could also be higher “depending on behavioral assumptions and avoidance questions,” Watson from the Tax Foundation said.