The conversation around eliminating taxes on tips for service and hospitality workers has been reignited after former President Donald Trump and Vice President Kamala Harris expressed support for the idea during campaign rallies in Las Vegas. Trump originally proposed eliminating the tip tax in June, while Harris recently called for this along with raising the federal minimum wage. Both candidates hope to win over voters in the key swing state of Nevada.
Approximately 4 million workers, less than 3% of the U.S. workforce, regularly earn tips, including wait staff, bartenders, hairstylists, and baristas. These tips are taxed as part of their income, but about a third of tipped workers do not make enough to pay federal income taxes. Economic experts caution that eliminating taxes on tips could have negative impacts on the federal budget and the broader economy.
The idea of removing the income tax on tips is not new, as Republican Rep. Ron Paul introduced legislation in 2007 to exempt tips from federal income and payroll taxes. Recently, Republican Sen. Ted Cruz introduced a bill with bipartisan support from Nevada Democrats to exempt tips from federal income tax. American workers paid approximately $38 billion in tip taxes in 2018, but eliminating these taxes could potentially add to the federal deficit by reducing federal revenues by $150 to $250 billion over the next decade.
Both Trump and Harris have expressed support for eliminating tip taxes, but the potential impact on the federal budget and economy remains a point of contention among economic experts. Legislation would need to make it through Congress in order for Harris to deliver on this promise if elected.
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