Former President Donald Trump and Vice President Kamala Harris both support eliminating taxes on tipped income for service workers. It’s a politically advantageous policy — particularly in swing-state Nevada’s hospitality meccas — but tax experts are certain it would upend traditional compensation models and gouge another hole in the U.S. budget. “There’s a broad agreement among policy experts that this is a problematic way to do tax policy,” Marc Goldwein, the senior vice president and senior policy director for the Committee for a Responsible Federal Budget, told MM. The nonpartisan CRFB estimates that Harris’s proposal, which also calls for raising the federal minimum wage, would increase deficits by $100 billion to $200 billion over the next decade “before accounting for changes in tipping behavior.” Trump’s plan to exempt all tip income from federal income and payroll taxes would reduce revenue by $150 billion to $250 billion, though it could be “significantly more once behavioral effects are incorporated.” What does CRFB mean by “behavioral effects?” If you make tips tax free, workers and employers have an incentive to try to make gratuities a larger share of income. In practical terms, consumers would see more “Add gratuity?” pages when they swipe their credit cards — and not just at coffee shops, restaurants and bars. “It causes people to make economic decisions that play to the tax code,” Goldwein said. “So even with the best guardrails, it would cause us to move more toward a tip-based economy.” The Harris campaign says it would work with Congress to limit the tax exemption to the leisure, hospitality and gaming industries. As Nick Niedzwiadek and Bernie Becker reported on Monday, Harris would also include income restrictions to ensure that a tip-exemption would not be exploited by the wealthy. That would only stop “egregious cases,” Goldwein said, noting that tipping is now de rigeur at fast casual restaurants where it wasn’t previously an option. Surveys suggest that consumers have grown increasingly frustrated at being asked for tips at self-service kiosks or when they place pickup orders online. The creation of industry or income-specific guardrails would invariably lead to policy fights over which workers were excluded. Your MM host tips taxi drivers, plumbers and furniture movers. Should their tips be exempt? What about building doormen, sanitation workers and pool cleaners? What about gig economy workers? Depending on how wages fluctuate at tipped positions, tax exemptions could lead some workers to cycle out of lower-paying “care economy” jobs at health or child care facilities for positions at leisure or hospitality businesses. Improving access and affordability for those services has been a core tenet of Harris’s campaign. “If you want to help low-wage workers, raising the federal minimum wage — and eliminating the tipped minimum wage — would be more effective policy levers for doing that,” Ernie Tedeschi, a former chief economist for President Joe Biden's Council of Economic Advisers, told MM. Of course, implementing a tax exemption for tips without guardrails would pose its own challenges. Shortly after Trump announced his plan to move forward with the policy, Sen. Ted Cruz (R-Texas) introduced the No Tax on Tips Act. The bill was derided by progressives like Center for American Progress Action Fund’s Brendan Duke, who said it lacked protections to keep white collar financiers from shifting their compensation to a tip-based model. (It’s not so far-fetched. Some fintechs ask for “tips” when they advance paychecks to their customers.) Duke, a former senior policy adviser to Biden at the National Economic Council, said Harris’s tip proposal is stronger because it’s part of a suite of policies designed to address cost-of-living challenges for low-wage workers, including raising the federal minimum wage and expanding child tax credits. Still, “my view is that the tip tax proposal is probably the least effective” within that suite, he said. Eliminating taxes on tips is “the most pro-worker thing in Trump’s policies. And this is a very small part of a sweeping package from Kamala Harris when it comes to workers.” IT’S TUESDAY — I too rely on tips. Harris said she’ll roll out her economic policy platform this week. How’s that going? If you know, tell me at ssutton@politico.com.
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