In Donald Trump’s narrative, the concept originated during a dinner at his Las Vegas hotel. A server lamented to him about the financial strain of paying taxes on her tips.
Trump, taken aback by this revelation, swiftly decided to address the issue with a bold campaign pledge: “No taxes on tips!”
This idea has quickly transcended its initial status as a campaign promise, becoming a significant policy proposition. The Republican Party has integrated it into their official platform, and House Speaker Mike Johnson, R-La., has expressed a commitment to passing the measure promptly. Interestingly, some Democrats, particularly those representing Nevada—a key swing state with substantial restaurant and casino sectors—have shown support for making tipped income tax-free.
The rapid ascent of this proposal underscores the often spontaneous nature of economic policy formulation under Trump. Several economists advising his campaign admitted they were unaware of the idea until Trump’s public announcement. Nonetheless, Republicans now view it as a strategic move to attract working-class voters in the contest against President Joe Biden.
Trump has actively encouraged his followers to communicate this promise to service staff by leaving notes on restaurant receipts, highlighting that a Trump victory in November would mean no taxes on tips. According to the Budget Lab at Yale, around 4 million Americans are employed in jobs where tips constitute a significant portion of their income.
Stephen Moore, a Trump economic adviser, acknowledged the impromptu nature of the proposal. “It wasn’t conceived by a panel of economists,” he remarked. “Initially, I was uncertain if he was serious, but politically, it’s a home run.”
Eileen Scott, a cocktail server at Harrah’s Las Vegas, voiced her support for the initiative. Scott explained that her employer withholds taxes from her paycheck based on an estimated amount of her tip earnings, an arrangement that she believes overestimates her actual earnings and results in higher tax liabilities. She expressed frustration, likening the situation to the mob, feeling exploited by the IRS.
While Scott appreciated Trump’s proposed solution, she remained a Democrat at heart. “I just want the discussion to begin so that we can ensure we’re able to support our families and cover our bills without overpaying taxes on income we’re not actually receiving,” she said.
Trump’s concise slogan—“no taxes on tips”—leaves several critical questions unanswered, particularly regarding the scope of the exemption. In the Senate, Ted Cruz, R-Texas, has introduced a bill that would exempt tips from income taxes only. However, many low-wage workers do not owe significant income taxes, limiting the potential benefits.
In contrast, a broader bill proposed by two House Republicans aims to exempt tips from both income and payroll taxes, which fund Social Security and Medicare. This approach could lead to a loss of up to $250 billion in tax revenue over a decade, as estimated by the Committee for a Responsible Federal Budget.
Howard Gleckman, a senior fellow at the Tax Policy Center, highlighted the trade-offs. “Exempting tips from payroll tax would increase take-home pay,” he noted. “However, it could reduce the benefits workers receive from Social Security and Medicare, potentially leaving them worse off in the long run.”
This proposal also raises broader policy questions. Some economists argue that offering such a substantial tax break exclusively to tip-reliant workers is inequitable, leaving other low-wage employees without similar benefits. Additionally, it could incentivize individuals, especially those with access to sophisticated tax planning, to reclassify their income as tips to evade taxes.
Casey Mulligan, an economist who worked in the Trump administration, warned, “Anytime you create an untaxed income category, some of your tax base will migrate into that category.”
The IRS has been attempting to better collect taxes on tipped income. Reports suggest that Americans underreport cash tips, leading the agency to launch a new voluntary compliance program for employers. In 2018, Americans reported about $38 billion in tipped income, according to IRS data.
Senator Kevin Cramer, R-N.D., recalled not reporting tips during his college years working as a host and busser. Trump’s proposal, he said, presents an opportunity for Republicans to counter the perception that they predominantly favor the wealthy.
The expiration of many 2017 tax cuts at the end of the next year offers a rare chance for Congress to revise tax policies. While these cuts included business tax breaks that benefit the wealthy, they also provided savings for working-class Americans. Adding the tip tax exemption to a broader bill could extend more benefits to low-income workers, Cramer suggested, reinforcing the idea that Republican tax cuts are inclusive.
Businesses, including Trump’s own hospitality enterprises, are also supportive. Sean Kennedy, executive vice president for public affairs at the National Restaurant Association, admitted he had not previously advocated for tax-free tips. However, following Trump’s proposal, he reached out to Republican legislators and the association endorsed Cruz’s bill.
“We learned about this just when you did,” Kennedy said.
