National Review‘s political reporter Audrey Fahlberg here, filling in again for Jim Geraghty while he’s on the NR Institute cruise.
On the menu today: Presumptive presidential nominee Donald Trump has a new favorite campaign talking point — exempting tips from taxes. I spoke with some senators about the fledgling proposal earlier this week.
Democrats Don’t Outright Dismiss the Idea
Trump first tested this idea during a campaign event earlier this month in Nevada, a battleground state with an enormous hospitality, tourism, and service industry. “For those hotel workers and people that get tips, you’re going to be very happy. Because when I get to office, we are going to not charge taxes on tips,” he told rally-goers in Las Vegas after apparently getting the idea from a waitress there.
Under current law, tips are subject to payroll and income taxes, and changing the tax code would require congressional buy-in. Critics on and off Capitol Hill are panning the move as an election-year play to shore up support from young voters and service-workers in this ultra-competitive state Trump lost in 2016 and 2020.
Other skeptics are quick to point out that exempting tips from taxes is an idea would be rife with unintended consequences, including more tipping for customers, giving some tip workers a tax advantage over wage earners, and incentivizing workers and employers to classify more work as tippable income (more on that below). If enacted, the proposal would also slash federal revenues: Recent analysis from the nonpartisan Committee for a Responsible Federal Budget estimates the proposal could cost the federal government between $150 billion and $250 billion in revenue over ten years. (Trump reportedly proposed to House GOP lawmakers offsetting federal revenue losses by raising tariffs on all imported goods.)
But politically speaking, exempting tips from taxes is tricky for Democrats to spin as a tax cut for Trump’s rich friends, as Charlie pointed out on Tuesday’s episode of The Editors podcast. It’s no wonder then that many Senate Democrats are hesitant to dismiss the proposal out of hand. “I’m always for workers getting a fair shake. Let’s see what is proposed,” Senate Finance Committee chairman Ron Wyden (D., Ore.) told Roll Call last week.
Pressed with questions from NR about the proposal earlier this week, some Democratic lawmakers sought to reorient the discussion to other parts of Trump’s tax policies they dislike.
“Donald Trump has put the U.S. tax code on the auction block. He thinks that if he can tell his big donors to put money into his campaign coffers, then he’s going to cut their taxes. He’s already said so,” Senator Elizabeth Warren (D., Mass.) told NR in a brief interview in the U.S. Capitol Tuesday afternoon. “He doesn’t have a coherent tax policy. He’s throwing things out and hoping something will attract somebody. When he puts together a serious tax package, then people will take a serious look at it — but not until.”
Senator Chris Van Hollen (D., Md.) told NR and other reporters Tuesday he hasn’t “had a chance” to think about the proposal in serious detail but was quick to pan Trump’s tax policies as being “heavily weighted to the very rich.” He mentioned a business roundtable Trump held in Washington, D.C., last week, where the former president reportedly told a private gathering of some of the country’s wealthiest CEOs that if elected, he would cut regulations as well as cut the corporate-tax rate to 20 percent, down from 21 percent.
“So maybe he’s trying to put something else into the mix,” Van Hollen said of the tax-free-tip proposal. “But again, his core tax message when he got behind closed doors with a lot of very rich people was he was going to give them a lot of tax breaks. . . . We also saw him get in front of oil executives and he essentially says: ‘If you contribute big to my campaign, I’m going to get rid of regulations.’ So it’s all transactional, and most of the transactions involve trying to get very wealthy people and big corporations to contribute more to his campaign.”
Senate Banking, Housing, and Urban Affairs Committee chairman Sherrod Brown (D., Ohio) declined to weigh in on Trump’s tax-free-tip proposal when pressed for comment by NR in the U.S. Capitol Tuesday afternoon. “No, I don’t have anything to say, sorry,” said the vulnerable Senate Democrat, who is seeking reelection this cycle in a state Trump carried by eight points in 2016 and 2020. “Not to National Review — no offense.”
Republicans Warm to the Idea
Speaking with reporters last week, many House Republicans characterized Trump’s tax-free-tip proposal as worth looking into, and Representatives Thomas Massie (R., Ky.) and Matt Gaetz (R., Fla.) have already introduced legislation to make the idea a reality. Others are already voicing concerns that the policy would favor some workers over others and make it harder for Congress to rein in ballooning deficits.
On the Senate side, Republican lawmakers have been similarly interested in giving the proposal a serious look. Senator Cynthia Lummis (R., Wyo.) called Trump’s proposal a “fabulous” idea. “The wisdom behind the idea is if you really want to help a segment of the population that’s tremendously impacted by the cost of food and gasoline and rent, help the service workers,” Lummis told NR Tuesday afternoon. “So it’s one of those things where good policy and good politics merged.”
“It makes a lot of sense to a lot of us, because how do you keep track of who’s getting cash tips versus on card?” South Dakota senator Mike Rounds told reporters last week. “If there was something we could do to really energize that particular segment of the population, that might be a real popular thing to do and a positive one in terms of the economy.”
Recall that many provisions of the 2017 Tax Cuts and Jobs Act are set to expire in 2025, which means tax policy is on the ballot in November.
Skeptical of Trump’s tax-free-tips proposal? I recommend listening to NR’s Dominic Pino, also from the Tuesday Editors (about 18 minutes in), as well as Tuesday’s episode of the Wall Street Journal’s Potomac Watch podcast (transcript here). Here’s Kyle Peterson from the Journal’s opinion page chatting about some of the unintended consequences that could emerge because of rewriting the tax code to disproportionately favor tip-heavy industries:
It seems like this is an idea that would narrow the tax base, which is the opposite of what economists say you want. You want low rates that are applied evenly to a broad base of income without a lot of carve-outs, and that was the direction that the 2017 tax cuts went, and this would be a move in the opposite direction. I do worry, as Kate says, that it would create incentives for companies and workers to structure their income as tips and so things that are not generally thought of as tipped jobs right now, maybe your plumber, your tree guy, the guy who mows your lawn, there would be an incentive to get as much of that money that is being paid right now just as a fee for the service, there’d be an incentive to transform that into tips, which I think would be economically pretty destructive. And then I agree also that this looks like such a clear effort at a vote buying scheme.
ADDENDUM: Check out Wall Street Journal reporter Jimmy Vielkind’s latest piece on indicted Democratic senator Bob Menendez’s “lonely” campaign to keep his Senate seat. “The New Jersey Democrat, who has been in office since 2006, and his wife personally asked patrons at Meson Español for signatures to help him get a spot on the November ballot as an independent candidate,” Vielkind reports. “The scramble illustrated just how far the once powerful committee chairman has fallen since he was hit with corruption charges in September, and just how isolated he is in his effort to cling to power.”