by Michael Schaus, The Nevada Independent, August 18, 2024
With former President Donald Trump and Vice President Kamala Harris both using Las Vegas campaign stops to call for eliminating federal taxes on worker’s tips, it’s pretty clear sign that #WeMatter.
It’s also pretty clear that political pandering is more important to both camps than crafting well-thought out and detailed policy prescriptions for what ails our economy.
When Trump unveiled his plan to make tips exempt from income tax, there was plenty of speculation that his promise was little more than a crass attempt to win the loyalty of Las Vegas service industry workers. And that’s probably a fair assessment.
After all, it is an election year.
The proposal was also notable for just how light it was on details. To date, Trump has not identified what spending cuts or detailed fiscal policies would be implemented to offset the expected drop in federal revenue of such a tax break. Nor has he given any apparent consideration to how such a policy might further complicate the tax code and distort marketplace incentives.
For those interested in fiscally sound public policy, such details should matter. In 2018, which is the most recent year for which we have data, the Internal Revenue Service reported about $38 billion in tipped income among 6.1 million American taxpayers. A great deal of the taxes currently collected on such income are payroll taxes that fund entitlement programs such as Social Security — programs that are already heading directly toward a fiscal crisis in coming years.
Should “tax free” mean payroll taxes are no longer collected on tipped income, that crisis will only arrive sooner.
Of course, no one who’s been paying attention to politics since 2016 seriously expected the Trump campaign to sift through such nuanced policy details. Much like his promise to have Mexico pay for a big “beautiful” border wall, his promise to Nevada’s service workers was designed for the sole purpose of sounding good to voters — practical challenges of actually keeping his word be damned.
Nonetheless, it definitely sounded good to a great many voters who earn their livelihood in the service industry — which is why the Harris campaign decided to basically plagiarize the proposal at a Las Vegas campaign stop just a couple months later.
Just like Trump, however, Harris has been reticent to provide details. And, like Trump, that lack of specificity is undoubtedly deliberate. After all, why get bogged down in policy when bumper sticker slogans are all voters seem interested in?
Practically speaking, however, such details are going to matter tremendously when either candidate assumes office next year. And while tipped workers might eagerly look forward to a massive tax break in the near future, they should brace themselves for the inevitable complications that will arise as a result.
For starters, many tipped workers are already incidentally among the most likely taxpayers to be audited by the Internal Revenue Service. Despite assurances that extra funding would increase the agency’s focus on high-income earners, a whopping 63 percent of IRS audits have targeted households earning less than $200,000, according to a Wall Street Journal analysis of U.S. Treasury reports. Other analyses have shown that deductions and credits designed to help the working poor — such as the Earned Income Tax Credit — are similarly putting lower income individuals in the agency’s crosshairs at much higher rates than other Americans.
Tipped workers, unfortunately, often fall into both categories. And further increasing the likelihood of an audit is the fact that, according to the IRS, tips are already among the most underreported income categories with only 55 percent of what is likely owed being paid to federal coffers. That low compliance rate means the IRS is currently highly incentivized to scrutinize the reported income of tipped workers to an even greater degree than other taxpayers — which is one of the reasons the IRS has ramped up its efforts to track tips more accurately.
While it might be tempting to think exempting such income would eliminate this heightened level of scrutiny, the opposite is actually more likely.
If tips are to suddenly become a tax-free source of income, workers and employers alike will be highly incentivized to restructure their pay schedules and income to lower their tax burden. In effect, tipped income would become a sort of tax haven — and ever more taxpayers would look to shelter as much of their earnings as possible by classifying it as part of this newly exempted category of income.
For consumers, this would mean even more touchscreens prompting customers for 30 percent tips on every purchase. However, for IRS auditors, this would mean extra incentive to scrutinize returns that claim a large percentage of income as tax free. Combined with the long history of the IRS targeting low-and middle-income families rather than lawyered-up high-income tax cheats, such scrutiny could be a nightmare for the many service workers who depend heavily on cash tips in the service industry.
Concerns that tax enforcement efforts will fall disproportionately on lower-income taxpayers is just one of countless questions that haunt the policy proposals from both candidates. How such exemptions would be offset in the federal budget, how it will impact the funding for entitlement programs and how the marketplace will adapt are other basic details that neither candidate seems willing to explore.
And we probably shouldn’t hold our breath for such pragmatic policy discussions to take place any time soon. In our era of cat-lady comments and “vibe” driven political strategy, bickering about crowd size and trading personal attacks will be the bulk of what we see in the next couple months. A realistic look at the economic, social and marketplace implications of tax-free tips is simply too substantive and nuanced for two campaigns that merely want to placate a critical contingent of workers in the all-important swing state of Nevada.
Sure, as a Nevadan it’s nice to know #WeMatter enough for both candidates to pander to us — but it would be even nicer if the candidates occasionally felt their promises had to be detailed and practical.
Michael Schaus is a communications and branding expert based in Las Vegas, Nevada, and founder of Schaus Creative LLC — an agency dedicated to helping organizations, businesses and activists tell their story and motivate change. He has more than a decade of experience in public affairs commentary, having worked as a news director, columnist, political humorist, and most recently as the director of communications for a public policy think tank. Follow him at SchausCreative.com or on Twitter at @schausmichael.