How “No Tax on Tips” Could Backfire

Just over a week into his second presidency, Donald Trump is moving at breakneck speed, signing executive orders and implementing ambitious policy reversals that could have transformative effects. Amid this blizzard of activity, some of his narrower, more specific proposals might be overlooked. One that gained significant attention during the campaign was his pledge to do away with taxes on tip income.

If Republicans want to pursue this policy, they’ll need to answer some questions about what Trump’s promise means. And they’ll need to be careful that the idea doesn’t turn into a budget-buster.

Several key considerations will dictate the cost of not taxing tips. Does “no taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on tips” mean no income taxes, or no income taxes and no payroll taxes? It also matters whether the untaxed tips represent all income classified as tips, or just tips earned in specific service industries that historically rely on tips, like food services or hospitality.

The effects of these decisions add up. The Tax Foundation estimates that exempting tips from the income tax would cost $118 billion in revenue over the next decade. Including exemptions from both the income and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. would end up costing closer to $200 billion.