Presidential candidates Kamala Harris and Donald Trump have surprisingly found common ground on one issue: both agree that tips should no longer be subject to federal income taxes. However, this seemingly positive change could have unintended consequences that may impact workers and the federal budget.
The Committee for a Responsible Federal Budget, a nonpartisan nonprofit, has estimated that Harris’ plan could increase the federal budget deficit by $100 billion to $200 billion over 10 years. Trump’s plan is even more concerning, with projections suggesting it could add $150 billion to $250 billion to the deficit over the next decade. Changes in tax policies often have ripple effects that are not immediately apparent.
Americans’ Changing Attitudes Towards Tipping
Recent surveys indicate that many Americans are growing weary of the traditional tipping culture. A Bankrate survey found that 59% of U.S. adults have negative views towards tipping, with many believing that businesses should pay their employees better without relying heavily on tips. The practice of tipping has also come under scrutiny, with concerns about businesses implementing pre-entered tip screens and the overall amount customers are expected to tip.
The proposal to eliminate taxes on tips may exacerbate the situation by potentially incentivizing businesses to classify more employees as “tipped workers” in order to benefit from the tax exemption. This could lead to a scenario where workers, especially those in the service industry, become even more reliant on tips as their main source of income.
Despite some municipalities having higher minimum wages for tipped workers, making a living solely on tips has become increasingly challenging. The COVID-19 pandemic brought temporary support for service-industry workers, but tipping frequency has declined in recent years.
- In 2023, 75% of sit-down restaurant diners always tipped, compared to 67% currently.
- 63% always tipped their barber/hair stylist in 2023, which has decreased to 55%.
- 59% always tipped for food delivery in 2023, but now it’s 51%.
- 48% always tipped their taxi/rideshare drivers in 2023, now down to 41%.
The shift in tipping behaviors is particularly noticeable among younger generations, with Gen Zers tipping less frequently compared to older generations.
Concerns Over Exploitation and Tax Avoidance
There are worries that highly-paid professionals could exploit the tax-free nature of tips, potentially classifying large bonuses as tips to avoid federal taxes. This loophole could further widen the budget deficit and fail to benefit the intended blue-collar workers. Vice President Harris has suggested implementing income limits on tax-free tips to prevent such abuse, but the specifics of Trump’s plan remain unclear.
Challenges Faced by Tipped Workers
Many tipped workers do not report all their cash tips, leading to underreporting and potential tax evasion. The reliance on tips also means that these workers are at the mercy of customer behavior, with fluctuations in income based on customer generosity. Additionally, tipped workers often lack benefits such as paid time off, health insurance, and retirement savings plans, leaving them financially vulnerable.
The Need for Comprehensive Support
While the idea of eliminating federal taxes on tips may sound appealing, it may not address the underlying issues faced by workers in the service industry. Instead of focusing solely on tipping policies, politicians should prioritize increasing wages and benefits for workers to ensure their financial stability.
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