By Ben Ritz
When Donald Trump and Sen. Ted Cruz (R-Texas) first proposed to exempt tips from federal income taxes last month, it sounded to many like a common-sense way to give tax relief to working Americans who feel left behind by Washington policymakers. But the proposal was deeply flawed: low-income service workers already have little-to-no federal income tax liability. The main beneficiaries would be savvy professionals who reclassify the bulk of their income from wages to tips, for which the legislation introduced by Cruz had no guardrails to protect against. Tax experts from across the political spectrum rightly panned the idea.
Unfortunately, Kamala Harris gave bipartisan cover to this dubious new loophole by endorsing a modified version of it last weekend. Harris marginally improved upon the GOP proposal by calling to limit tax-exempt tips to workers in the service and hospitality industry, and only for those whose total annual incomes are below a number to be specified later. But let’s say she were to use the same income threshold of $125,000 that the Biden administration used for other “means-tested” policies over the past four years. Is it really fair for a server at a high-end restaurant making $125,000 to pay a lower tax rate than a retail worker or public-school teacher making half as much? No.
If Harris or Trump want to give real tax relief to working families across the country, the right way to do so would be by repealing the 15.3% federal payroll tax that workers and their employers pay on labor income up to $168,600. The average waiter would see their annual take-home pay increase by up to $5,000 if the payroll tax were repealed, which is more than twice the tax cut they would get if tips were exempted from federal income taxes. And unlike the misguided tip tax exemption, this policy would also benefit working Americans who earn most of their incomes through wages instead of tips.
Although repealing the payroll tax in isolation from other tax and spending reforms would be prohibitively expensive for the federal government, my team at the Progressive Policy Institute published a comprehensive blueprint last month that shows it can be done while simultaneously putting the federal budget on a path back to balance within 20 years.
