Kamala Harris eyes guardrails on plan to eliminate taxes on tips

Vice President Kamala Harris is considering limits on her proposal to end the taxation of tips, exploring new details for her version of an idea first pushed by her Republican rival, former president Donald Trump.

Harris’s advisers have discussed only exempting taxes on tips for service and hospitality workers who earn $75,000 per year or less, according to three people familiar with the campaign’s thinking, who spoke on the condition of anonymity to discuss private conversations. While the plan would exempt tips from federal income tax, tipped earnings would still be subject to payroll taxes, the people said, because those taxes fund Social Security and Medicare. Harris’s plan would also cap the amount of income workers could claim came from tips.

The internal discussions about these potential guardrails - which have not been finalized and may still become part of Harris’s public proposals during the campaign - reflect a desire among Democratic experts to refine a policy idea many of them criticized when Trump introduced it in June.

Many economists balked at the Trump plan, arguing it would distort the tax code and create opportunities for affluent Americans to reclassify their income as tips to cut their tax liability. Harris’s campaign advisers have sought to neutralize the political advantage Trump gains from the idea, which she endorsed in Nevada on Aug. 10, while also limiting its broader effects.

It’s not clear whether any version of the proposal would be able to pass Congress, but the idea has gathered bipartisan momentum with surprising speed. In addition to an endorsement from Harris, Republican Sens. Ted Cruz (Texas), Steve Daines (Mont.), Kevin Cramer (N.D.) and Rick Scott (Fla.) have introduced legislation aimed at turning Trump’s plan into reality. Nevada’s two Democratic senators, Sens. Jacky Rosen and Catherine Cortez Masto, also support the bill. (The GOP measure has no income cutoff and would provide a 100 percent deduction on federal income taxes for any earnings from tips.)

Harris would also seek to tie legislation to cut taxes on tips with an increase to the national tipped minimum wage, the people familiar with the campaign’s discussions said. Tipped workers earn a minimum of $2.13 per hour, compared with $7.25 for non-tipped workers.

The Harris campaign cited a previous statement by an official to The Washington Post, saying that if elected, 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.”

The Trump campaign has derided the Democratic nominee as “Copy Cat Kamala,” saying she “stole President Trump’s No Tax on Tips proposal.” Trump’s campaign has not offered many details about his own plan. He has also said he wants to end taxes on Social Security benefits, without providing details.

“We’re not going to tax tips. All of a sudden she comes out and she says the same thing, exactly the same words that I used, months later and other things,” Trump said at a rally in Pennsylvania on Monday. “She’s, like, trying to copy my policy. But it takes much more than copying a policy because they’re never going to produce it anyway.”

Either version of the proposal could cost as much as $200 billion over the next decade in lost tax revenue, according to the nonpartisan Committee for a Responsible Federal Budget. Phasing out the tax exemption for those earning more than $75,000 would reduce the cost to roughly $100 billion, according to CFRB.

Many economists say the change would not help most low-income Americans. Tipped workers, including hairdressers, bartenders and restaurant servers, represent fewer than 3 out of every 100 workers in the U.S., according to an analysis by Yale’s Budget Lab. Just 5 percent of workers in the bottom quartile of all wage earners - in other words, the lowest-wage workers in the whole U.S. economy - earn tips.

Tipped workers are also far more likely to be teenagers and young adults under 25 than other workers are.

The Yale analysis found that at least 37 percent of tipped workers already don’t pay federal income tax because they don’t earn enough each year.

Some economists welcomed narrower eligibility criteria but said the idea is still fundamentally a bad one.

A GOP policy aide pointed out that the IRS defines requirements for reporting and that reclassifying non-tip income as tips is fraud, suggesting fears of gaming the system were overblown.

Both campaigns have sought to use the issue to drive populist economic messages.

Harris has used the tip tax proposal as part of a discussion of overall “tax fairness,” including plans to increase rates on wealthy individuals and corporations and expand the child tax credit and earned income tax credit for parents and middle-class taxpayers.

“Spending through the tax code is more appealing to Republicans, because they can say they can give you a tax cut, and it’s acceptable to Democrats, because it has government helping people without having to do an actual social program,” said Jason Fichtner, chief economist at the Bipartisan Policy Center think tank. “That’s why you’re now seeing the one-upmanship from both candidates is because they are trying to find ways to give something to voters, because voters are always asking, What do I get for my vote?”

The tip-tax plans could also complicate workers’ eligibility for other anti-poverty tax credits. Exempting tips from taxes could push some workers into higher income brackets that cannot claim the earned income tax credit, which is worth nearly $8,000 for some taxpayers - probably more than they’d save from the new plan.

In a speech laying out her economic platform last week, Harris announced a proposal to expand the earned income credit by up to $1,500.

• Julie Zauzmer Weil contributed to this report.