Vice President Kamala Harris is considering a $75,000 income cap and restrictions on the amount of tip income that could be exempt from taxes.
As reported by The Washington Post, these potential guardrails reflect efforts to refine a policy idea initially introduced by her Republican rival, former President Donald Trump.
The Harris campaign discusses exempting tips taxes only for service and hospitality workers earning $75,000 or less annually. While the plan would exempt tips from federal income tax, tipped earnings would still be subject to payroll taxes to fund Social Security and Medicare. Additionally, the campaign is considering capping the amount of income workers could claim as tips.
The proposal to eliminate taxes on tips has gained unexpected bipartisan momentum. Republican Senators Ted Cruz, Steve Daines, Kevin Cramer, and Rick Scott have introduced legislation to implement Trump's plan. Nevada's Democratic senators, Jacky Rosen and Catherine Cortez Masto, also support the bill.
The Republican measure differs from Harris's potential plan as it has no income cutoff and would provide a 100 percent deduction on federal income taxes for any earnings from tips. This broader approach has raised concerns among economists about potential distortions in the tax code and opportunities for affluent Americans to reclassify their income as tips to reduce their tax liability.
Harris's team is also considering tying the legislation to an increase in the national tipped minimum wage. Currently, tipped workers earn a minimum of $2.13 per hour, compared to $7.25 for non-tipped workers.
The proposed tax exemption on tips could have significant economic implications. According to the nonpartisan Committee for a Responsible Federal Budget, either version of the proposal could cost up to $200 billion in lost tax revenue over the next decade. Implementing an income cap of $75,000 could reduce this cost to approximately $100 billion.
Many economists have criticized the plan, arguing that it would not significantly benefit most low-income Americans. Tipped workers represent less than 3% of the U.S. workforce, and only 5% of workers in the bottom quartile of wage earners receive tips. Furthermore, at least 37% of tipped workers already do not pay federal income tax due to their low annual earnings.
The Trump campaign has accused Harris of copying their policy, with Trump stating at a rally in Pennsylvania:
We're not going to tax tips. All of a sudden she comes out and she says the same thing, exactly the same words that I used, months later and other things. She's, like, trying to copy my policy. But it takes much more than copying a policy because they're never going to produce it anyway.
The proposed tip tax exemption could complicate workers' eligibility for other anti-poverty tax credits. By exempting tips from taxes, some workers might be pushed into higher income brackets, potentially disqualifying them from claiming the earned-income tax credit, which can be worth up to $8,000 for some taxpayers.
Both campaigns are using the issue to drive populist economic messages. Harris has incorporated the tip tax proposal into a broader discussion of "tax fairness," including plans to increase rates on wealthy individuals and corporations while expanding tax credits for parents and middle-class taxpayers.
Jason Fichtner, chief economist at the Bipartisan Policy Center, explained the appeal of such proposals:
Spending through the tax code is more appealing to Republicans, because they can say they can give you a tax cut, and it's acceptable to Democrats, because it has government helping people without having to do an actual social program. That's why you're now seeing the one-upmanship from both candidates is because they are trying to find ways to give something to voters, because voters are always asking, 'What do I get for my vote?'
Vice President Kamala Harris is considering limitations on her proposal to eliminate taxes on tips, including an income cap of $75,000 and restrictions on the amount of tip income that could be exempt. The plan has gained bipartisan support, with Republican senators introducing legislation to implement a similar idea. However, economists have raised concerns about the potential economic impact and effectiveness of helping low-income workers.
