Former President Donald Trump has pledged to nix taxes on tipped income, which could cost federal government up to $250 billion over 10 years.
A new analysis from the Committee for a Responsible Budget estimated Trump’s plan to exempt all tip income from federal income and payroll taxes “would reduce federal revenues by $150 [billion] to $250 billion over 10 years on a static basis and could reduce revenue significantly more once behavioral effects are incorporated,” according to the report.
Under existing law, tips are treated as ordinary income and subject to both federal income and payroll taxes. However, tips are under reported and employers get subsidized for paying their share of the payroll tax on tips through a FICA tip credit, according to the Committee for a Responsible Budget.
“No tax on tips, OK? It’s done. Done,” Trump said at a recent event. “And we need to spread the word so that every time you leave a tip for the next five months, you put on the receipt, vote for Trump, because there’s no tax on tips.”
The Committee for a Responsible Budget noted some uncertainty in its estimate. Trump’s campaign hasn’t put out any details on the former president’s tip tax plan. So that limits some of the accuracy of the estimate. Another factor is human behavior.
“In practice, exempting tip income from taxation would lead workers and employers to reclassify ordinary income as tip income where possible and could lead to a larger shift toward lower base pay and higher tipped income, more broadly,” according to the CFRB report. “The magnitude of that behavioral effect is uncertain and would depend significantly on the regulatory guardrails that accompany the policy.”
The same group has estimated that extending the Trump-era tax cuts set to sunset as part of the Tax Cuts and Jobs Act of 2017 would mean $5 trillion in less revenue for the federal government.
Projections show that extending provisions of Trump’s 2017 tax cut past their sunset dates would add $4 trillion to the federal deficit over the next decade if not offset by other actions, such as expense cuts.
Extending the individual income tax provisions of the 2017 tax act would add $3.3 trillion in primary deficits through 2034, according to the latest figures from the Congressional Budget Office. The CBO report cited estimates from the Joint Committee on Taxation, the nonpartisan tax policy and revenue estimating service for Congress.
Most of the individual income tax provisions of the 2017 tax act are set to expire at the end of 2025. The expiring provisions affect statutory tax rates and brackets, allowable deductions, the size and refundability of the child tax credit, the 20% deduction for certain business income, and the income levels at which the alternative minimum tax takes effect, according to the CBO report.
