Economists put massive price tag on tax policy that Trump and Harris are both championing

Vice President Kamala Harris and former President Donald Trump are both supporting the elimination of taxes on tips for service and hospitality workers, a rare point of agreement for candidates that differ on most issues.

After Harris voiced her support for the policy, Trump criticized her for adopting what he claimed was originally his idea, accusing her of political opportunism. However, a Harris campaign official emphasized that her proposal is different and would include an income limit and strict requirements to prevent high-income earners from exploiting the policy.

But there are some who are not as supportive: tax policy experts. Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, told NPR hat the idea is flawed in terms of equity, efficiency, and revenue generation. Rosenthal pointed out that the policy would disproportionately benefit workers in states with lower minimum wages where tips constitute a larger portion of their income, such as South Carolina, compared to states like California, where the impact would be less significant.

Rosenthal also raised concerns about the administrative challenges of implementing such a policy, questioning how it would be determined whether an income is derived from tips or wages, and how potential abuses, such as high-income earners seeking to reclassify their compensation as tips, could be prevented. Additionally, he noted that the proposal could lead to substantial revenue losses, estimated at several hundred billion dollars over a decade, making it a difficult pill for Congress to swallow.

Concretely, a study by the Tax Foundation concluded that the "lower bound cost" would be of around $107 billion over 10 years for an income tax exemption only, "assuming tips as a share of total wage income remains as it was in 2018 and applying the marginal tax rate on wages faced by taxpayers making between $30,000 and $40,000 (waiters and waitresses earn a median wage of about $32,000 and a mean wage of $36,500)."

Garrett Watson, a senior policy analyst at the Tax Foundation, echoed these concerns with the outlet, describing the underlying policy rationale as weak. Watson referenced a recent study by The Budget Lab at Yale University, which found that only a small percentage of workers would benefit from a no-tax-on-tips policy (only 2.5% of them). He also expressed a desire for more detailed proposals from both campaigns, noting that this policy lacks the extensive background and analysis typical of other tax initiatives.

As the debate continues, both campaigns have yet to release comprehensive details on how they plan to implement their respective versions of the tax-free tips policy.