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Ending the practice of taxing tips has become one of the hottest issues on the presidential campaign trail.
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Former president Donald Trump first raised the issue in June while talking to Nevada voters. Now, Vice President Kamala Harris wants to stop taxing tips, too.
“Eliminating taxes on tips is smart messaging to earn votes from key working-class demographics and in customer service-heavy swing states like Nevada,” said Dustin Siggins, a business columnist and founder of the PR firm Proven Media Solutions.
GOBanking Rates spoke to Siggins and other experts about the eight ways that not taxing tips might affect your wallet.
‘Tipflation’
Tipping was often a “thank you” gesture for receiving good customer service. Now, a tip of at least 20 percent is customary.
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In fact, Americans spend nearly $500 a year on tips, more than they want to in a phenomenon called “tipflation.” According to a survey by Talker Research, customers say they “reluctantly tip” an average of $37.50 a month due to social pressure. That guilt can equal $453.60 a year.
However, more than 5 million people rely on tips to supplement their income. The national minimum wage is $7.25 an hour, but states can set their rates.
Your Federal Tax Bill
The federal government counts both tips and wages as income – whether the customer uses a credit card or if employees have a tip-sharing agreement.
If an employee’s tips aren’t enough to cover their tax bill, they must either pay the difference out of pocket or ask their employer to withhold more money from their check.
Employers are also responsible for including tips and wages when they withhold federal income, Social Security, and Medicare taxes during the pay period.
Harris’s proposal “may result in lower incomes for already struggling tip-reliant workers because employers will shift more income responsibility to workers’ initiatives and customer service capabilities,” Siggins said.
Harris is also taking a carrot-and-stick approach to not tax tips. She proposed increasing the minimum wage rate (carrot), but tips would still be subject to payroll taxes (stick).
More Money In Your Pocket
Advocates of ending the practice of taxing tips said it would put more money in people’s pockets, especially those who depend on tips for three-quarters of their income.
“Ending taxes on tips will not solve all issues for service industry employees,” said Bruce Thompson, a top Democratic influencer. “But it should have a very positive impact, especially on those workers who make more than the standard deduction.”
However, Wayne Winegarden, an economist at the Pacific Research Institute, said Harris’ proposal may have unintended consequences.
“The proposal reduces tax payments for a select group but will require either higher taxes on others or a higher overall debt burden on the government,” he said. “As a result, some consumers will be better off, others worse off, and for others, there will be no net beneficial impact.”
Shifting the Tax Burden
Thompson said the key will be ensuring that there are no loopholes for others to shift their income to tax-free tips.
However, changing federal income taxes on tips could also make the tax code less efficient.
“Not taxing tips makes the tax code more complex and treats similar income differently,” Winegarden said. “It also encourages people to recategorize their income as tips to avoid taxes and creates inequities since people earning low incomes who do not receive tips will pay taxes while tipped employees won’t.”
What Government Services You Receive
Exempting tips from taxes means the federal government gets less money to pay for programs and services.
For example, the Committee for a Responsible Federal Budget estimated that exempting tips from the income and payroll tax would reduce federal revenue by $150 billion to $250 billion between 2026 and 2035.
That means the government would have to bridge the shortfall by raising taxes on high-income earners, broadening the tax base, cutting services, reducing tax deductions and credits, or a combination of these measures.
Increased Taxes
Winegarden said that if the federal government doesn’t cut spending or increase taxes, exempting tips from federal income taxes could lead to a larger national debt.
“Either way, overall economic growth will be negatively impacted,” Winegarden said. “As a result, the proposal will reduce income growth, which will harm consumers.”
Your Social Security Benefits
Currently, Social Security, including its trust fund, has enough money to pay full benefits to older adults for 11 more years.
Harris and Trump said they wouldn’t touch Social Security money if elected. However, the federal program faces a potential shortfall if policymakers don’t take steps to shore up funds.
Net Effect
Nevertheless, Harris supporters said that ending federal income taxes on tips is just one component of Harris’s economic proposals to help middle-class families.
“Vice President Harris has talked about installing guardrails to insure the benefits go to service works,” Thompson said. “She will have to work closely with Congress to make sure that happens.”
Editor’s note on election coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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This article originally appeared on GOBankingRates.com: Kamala Harris Wants to Stop Taxing Tips, Too — 8 Ways That Might Affect Your Wallet
