Why Trump and Harris both say 'no tax on tips'

Bartender Athena Young cleans glasses while speaking to the Review-Journal about the "no tax on tips" policy at Atomic Kitchen in Las Vegas, July 31.

In the hotly divided US presidential campaign, a rare area of agreement has emerged: Workers’ tips should not be taxed.

Former president Donald Trump, the Republican candidate, was first out of the gate with the proposal, announcing it at a rally in June.

Vice-president Kamala Harris, the Democratic opponent, came out in favour of the plan this weekend, earning her the nickname “Copy Cat Kamala” from the Trump campaign.

It is a proposal intended to win attention for the candidates from Americans who work in service industries – restaurant workers, bartenders, hairdressers, manicurists, taxi drivers and others, who often receive a significant portion of their income in tips.

Where does this matter and why?

Both candidates announced their support for the idea in Nevada, a state seen as a toss-up in the election.

Restaurants and hotels employ more than 20% of the workforce in the state, which is known for its Las Vegas casinos.

Mr Trump said he started to champion the policy after a waitress complained to him about her taxes.

Republicans, who have long favoured lower taxes, adopted it as part of their official party platform and several bills are now circulating in Congress, backed by restaurant lobby groups.

Some Democrats also have voiced support - including President Joe Biden, whose press secretary said that he backed the idea a day after Ms Harris endorsed the plan.

The discussion comes as electronic payments make tips easier to trace, raising the risk of failing to report or under-reporting such income, an historically common problem.

For all the buzz that ending taxes on tips has generated, however, it is a relatively niche issue.

Nationally, an estimated 4 million workers regularly receive tips – less than 3% of the overall workforce, according to an analysis by Yale University's Budget Lab.

What’s more, a significant share of those workers – about 37% - earn so little that they do not currently pay income taxes to the federal government at all, the analysis found.

What are the current rules?

Under the current law, employees are required to disclose all tips over $20 per month to their employer.

The federal government then collects a share via income and payroll taxes, which fund programmes such as Social Security. (States also have their own rules about income tax.)

Americans reported $38bn in tip income to the federal government in fiscal year 2018, the most recent year for which there is data.

On average, that amounted to just over $6,000 in income per taxpayer.

For some servers, however, tips can account for more than half of their hourly earnings, according to estimates from the National Employment Law Project.

What impact would this have?

The financial impact is unclear: Some of the proposals in Congress focus exclusively on income tax; others would exempt tips from both income and payroll tax.

The candidates themselves have been vague.

The Tax Foundation estimates that any change would cost at least $107bn over a decade and other estimates are higher.

But though eliminating taxes on tips might sound straight-forward politically, some analysts say that does not make it good policy.

They argue that it would unfairly shift the tax burden to workers who do not receive tips.

It also could encourage tipping to expand to new professions, which could lead to a much bigger financial impact than expected.

Others argue that cutting taxes on tips would benefit employers more than workers by distracting from the real issue: that businesses do not have to pay minimum wage to staff who receive tips.