Last week, Vice President Kamala Harris proposed two measures that would raise the incomes of lower-wage workers: raising the federal minimum wage and eliminating federal income tax on tipped wages for certain types of workers. While many have noted that Harris’ embrace of no tax on tips appears to be similar to a proposal that former President Donald Trump previously pledged, the policy impact would differ greatly. Harris’ plan is targeted to benefit hospitality and service workers, while Trump’s would open a giant loophole for the wealthy to avoid taxes.
Although the details of Vice President Harris’ wage-related proposals have yet to be specified, they are broadly consistent with her goals to build up middle-class families, as well as with the Biden-Harris administration’s record on improving the economic security of working families. One of the administration’s earliest legislative accomplishments was the passage of the American Rescue Plan Act of 2021, which included an expansion of the child tax credit (CTC) that contributed to cutting child poverty by almost 50 percent. While Congress allowed the expanded CTC to expire, the administration proposed a restoration of the expanded credit, which would cut taxes by an average of $2,600 annually for 39 million low- and middle-income families.
The administration’s fiscal year 2025 budget also called for expansion of the earned income tax credit (EITC) for low-paid workers who aren’t raising a child in their home. This expansion would cut taxes by an average of $800 annually for 19 million working individuals or couples.
The Biden-Harris administration has been consistently pro-labor in other policies as well. It invested in good union jobs through the Infrastructure Investment and Jobs Act and the Inflation Reduction Act and has strengthened enforcement of labor standards by the National Labor Relations Board.
Raising the minimum wage would be a major boost for tipped and other low-income workers
Tipped workers represent around 4 percent of workers earning less than $25 per hour. While exempting tipped wages from federal income tax has the potential to help this subset of lower-wage workers, a substantial share of these workers have limited federal income tax liability because their incomes are so low; therefore, other policies are needed to extend benefits to more low-wage workers.
Currently, 31 million workers earn less than $17 per hour. A significant increase in the federal minimum wage and elimination of the subminimum wage would thus bring even greater benefit to a broader set of lower-income workers. At $7.25, the federal minimum wage has remained unchanged since 2009, declining significantly in real terms since then. In addition, tipped workers, including those in hospitality and other services industries, have a sanctioned subminimum wage of $2.13 per hour at the federal level. This has remained unchanged since 1991. The existence of a subminimum wage for tipped workers shifts the burden of paying employees’ wages from employers to customers, and it creates a system rife with wage theft and abuse. Those who work for tips are more likely to experience sexual harassment, and states with large gulfs between the tipped and standard minimum wages see higher rates of poverty for workers in key tipped industries.
Only seven states and Washington, D.C., have abolished the tipped minimum wage or are in the process of doing so, in an effort to establish parity between tipped and nontipped workers. Analysis of those states’ economies demonstrates faster recoveries from the COVID-19-era employment crisis and robust hospitality economies, suggesting that the elimination of the subminimum wage is good for businesses, communities, and workers alike.
Raising the minimum wage would help those at the bottom of the income distribution. Using 2021 data, a Center for American Progress analysis found that on average, a worker with income at the 50th percentile would gain $800 per year if the minimum wage were increased to $15 per hour. One proposal before Congress, the Raise the Wage Act, would gradually increase the minimum wage to $17 per hour and eliminate subminimum wages for tipped, disabled, and short-term teenage workers.
Any policy to eliminate tax on tips must be carefully targeted to low-wage earners
A policy to eliminate taxes on tips could end up being regressive—benefiting the wealthy rather than low-wage earners—without proper measures to prevent tax avoidance. Such guardrails should include limiting the tax benefit to the leisure and hospitality industry and other occupations where tips are already customary; imposing an income limit; limiting the deductible amount; and implementing other provisions to prevent people from artificially minimizing wage income and taking the remainder of their compensation as tips.
Vice President Harris’ proposal appears to narrowly target the benefits of eliminating taxes on tips to service and hospitality workers; it does so by including guardrails to prevent high-income earners from gaming the tax system by reclassifying their income as tips. A Harris campaign official told The Washington Post that Harris would “work with Congress to craft a proposal that comes with an income limit and with strict requirements to prevent hedge fund managers and lawyers from structuring their compensation in ways to try to take advantage of the policy.”
In contrast, there is no indication that former President Trump’s promise to eliminate taxes on tips for “restaurant workers, hospitality workers, and anyone else relying on tips” would include a measure to prevent tax avoidance by upper-income earners, despite having opportunities in the two months since embracing the policy to clarify how it would prevent such outcomes.
The lion’s share of the gains from a proposal like Trump’s could easily go to high earners. For example, Trump ally Sen. Ted Cruz (R-TX) has introduced a bill, the No Tax on Tips Act, which was released shortly after the Trump proposal announcement and would open the door to upper-income tax avoidance. No provision in the bill would prevent high-income earners from reclassifying income as tips to escape paying federal income tax. Previous analysis by the Center for American Progress found that the bill would allow a married couple making $1 million in wages to receive a tax cut of $180,000 by simply shifting half of those wages to tax-free tips. As written, the bill would deliver tiny tax cuts to lower-income households that earn a large portion of their income from tips. Moreover, eliminating taxes on tips under this model would do nothing to help the roughly 96 percent of workers earning less than $25 per hour who do not currently receive tips.
Conclusion
While the benefit of eliminating taxes on tips would be limited for current low-wage workers, Vice President Harris offers complementary policies that would go a long way to properly reward Americans’ work through higher wages and to offer relief to low-income and middle-class families through the tax code. Trump and his allies may claim to be on the side of low-wage workers, but his proposal alone, like the Sen. Cruz bill, offers scant help to tipped workers and amounts to a big new tax loophole for the wealthy.