No Taxes on Tips? A Trump Idea Gains Ground.

In Donald Trump’s telling, the idea was born over dinner at his Las Vegas hotel, where the server for his table complained about the burden of paying taxes on her tips.

“I was actually surprised to hear it,” Trump said last month at a rally in Virginia, adding that he quickly decided to address the server’s problem with a new campaign pledge: “No taxes on tips!”

The proposal has rapidly become more than just a rally talking point. The Republican Party has officially embraced it in its platform, and House Speaker Mike Johnson, R-La., has said he would “pass it as soon as we can.” Some Democrats are also warming to making tipped income tax-free, with the two senators representing Nevada, a swing state with large restaurant and casino industries, endorsing it.

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The sudden popularity of exempting tips from taxes is a reminder of the improvisational nature of economic policymaking under Trump. Several economists involved in advising the Trump campaign said they hadn’t heard of the idea until Trump announced it publicly. But Republicans now see it as a key way to appeal to working-class Americans during the campaign against President Joe Biden.

Trump has encouraged his supporters to leave a note on restaurant tabs telling service staff that a Trump victory in November means no taxes on tips. Roughly 4 million Americans work in jobs where tips are common, according to an estimate by the Budget Lab at Yale.

“It’s not like a gang of economists sitting around a table came up with that,” said Stephen Moore, a Trump economic adviser. “I thought, ‘I don’t know if he’s being serious or not,’ but as a political matter it’s a home run.”

Eileen Scott is a cocktail server on the floor of Harrah’s Las Vegas, a casino where she makes much of her money in cash tips. Under an agreement she said Harrah’s had with the IRS, her employer withholds taxes from her paycheck based on an estimate for how much she earns in tips.

The arrangement meant that she and other employees did not have to record each of their tips, but Scott said it also seemed that the IRS assumed she made more than she actually did — and therefore she owed more tax.

“We want to pay our fair share, but we also don’t want to be taken advantage of,” she said. “I say it’s like the mob: They take what they want from us. We are pissed off about this.”

Although Scott said she was glad Trump proposed a fix, she still favored Democrats. “I just want the conversation to be started, so we can get to the point where we can take care of our families and pay our bills and not pay something we’re not making,” she said.

The four-word slogan Trump has put forward — “no taxes on tips” — still leaves several important details unaddressed. Namely: whether the exemption applies to all taxes. In the Senate, Ted Cruz, R-Texas, introduced a bill that would spare tips only from income taxes. Since many working-class Americans do not make enough money to owe much in income taxes, the savings for low-wage servers could be limited.

In the House, two Republicans have a broader bill that would exempt tips from income taxes as well as payroll taxes, which are collected from Americans’ wages to fund Social Security and Medicare. Such a move could cost as much as $250 billion in lost tax revenue over a decade, according to the nonpartisan Committee for a Responsible Federal Budget.

Because low-income workers generally owe more in payroll taxes, the House version could give more money back to servers, barbers and others, but potentially at a cost. By paying less in payroll taxes, those workers may not be able to claim as many retirement benefits from Social Security and Medicare.

“Exempting tips from payroll tax actually would increase their take-home pay,” said Howard Gleckman, a senior fellow at the Tax Policy Center, a think tank. “The downside is they wouldn’t pay into Social Security and Medicare, and so they would get fewer benefits or maybe no benefits at all.”

Then there are broader questions. Some economists wonder whether the federal government should offer such a juicy tax break just to workers who depend on tips, leaving other low-wage employees without a similar benefit. Doing so could also create an incentive for all types of Americans, especially ones with sophisticated accountants, to try to classify their income as tips to avoid owing taxes. Investment managers, for example, could try to solicit gigantic, tax-free tips from clients instead of collecting taxable fees.

“Anytime you have a category that’s untaxed, some of your tax base will slip into that category,” said Casey Mulligan, an economist who worked in the Trump White House and helped write this year’s Republican platform.

The IRS has in recent years taken steps to try to collect more taxes owed on tipped income. The tax agency said that Americans appeared to underreport earnings in cash tips, and it started a new voluntary compliance program last year for employers. Americans reported roughly $38 billion in tipped income in 2018, according to IRS data.

When Sen. Kevin Cramer, R-N.D., worked as a host and busser during college, he said he probably was not reporting the tips he earned to the tax collector. Still, he said Trump’s proposal inspired him as a way for Republicans to combat the “constant criticism that we favor the rich.”

Many of the tax cuts that Republicans passed into law in 2017 are set to expire at the end of next year, and the desire to renew them has created a rare opportunity to create tax policy in Congress. The 2017 cuts included both business tax breaks that primarily benefit the wealthy, as well as individual provisions that create savings for working-class Americans. Overall, the benefits of extending the 2017 tax cuts slant in favor of the rich, according to the Tax Policy Center.

Cramer said adding the exemption for tips to a broader bill next year would help bring more benefits to low-income Americans. “In that context, that’s where it really becomes genius — it says no one is being left out of these Republican tax cuts,” he said.

Businesses also like the idea; Trump is the owner of several hospitality businesses. Sean Kennedy, the executive vice president for public affairs at the National Restaurant Association, said he had not previously pushed for making tips tax-free. But after Trump floated it, he got in touch with Republicans on Capitol Hill, and the association endorsed Cruz’s bill.

“We heard about this when you heard about it,” Kennedy said.

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