What high roller weekend jaunt to the Las Vegas Strip is complete without valet car service and a steak dinner? A swanky hotel suite with a stocked mini bar and a view? A whirl around the gaming floor, complete with a spin of the roulette wheel and a hand of poker?
As is custom in Nevada, and throughout the U.S., all that top-tier service — from hotel housekeeping to casino dealers to restaurant cooks and more — equals a whole lot of tips.
But for many hospitality industry workers, the tips don’t feel quite so plentiful.
As Election Day nears, presidential candidates Donald Trump and Kamala Harris have spent time on their campaign trails touting several congressional “no tax on tips” proposals. While the idea is to reduce the amount of income that service workers pay Uncle Sam and keep more money in some of the country’s lowest-paid employees’ pockets, tax experts and other industry observers say the bills currently up for discussion could have unintended consequences.
That’s especially true for Nevada hospitality workers, said 51ԹϺ professor, attorney, and tax law expert Francine Lipman.
“Nevada is a very unique state for many obvious and some not so obvious reasons,” she said. “The ‘no tax on tips’ proposals would impact many hospitality workers in Nevada differently than workers in other Nevada industries and across the country predominantly because of the longtime exceptionally strong and engaged Culinary Union and our mega hospitality services employers.”
We checked in with Lipman for a rundown of the proposals, as well as her take on the viability and potential drawbacks for customers, employers, and workers both in the Silver State and beyond.
How does Nevada’s hospitality industry differ from others across the U.S.?
Nevada is unique because a significant percentage — about 20% — of its population works in the hospitality industry. This might be the highest percentage of any state. But this significance is even more exceptional when you consider that a meaningful percentage of these Nevada hospitality workers are members of strong unions.
These unions not only elevate workers’ rights for their members but in the marketplace at large. For example, Nevada is one of a few states that does not have a subminimum wage for tipped workers. This necessarily elevates the wages for all tipped workers by law.
What exactly have lawmakers proposed regarding taxes for tipped workers?
Like most issues in life, especially in tax law, the devil is in the details.
Initially, there were two bills in Congress. The bill proposed in the U.S. Senate this summer by Sen. Ted Cruz (R-TX) excludes tips from federal income taxation, but doesn’t exclude them from Social Security, Medicare, and unemployment taxes. Meanwhile, a House bill introduced by Rep. Thomas Massie (R-KY) and Matt Gaetz (R-FL) excludes tips from federal income and payroll taxes. There are no other restrictions, and this would certainly result in more workers relying on tip income across our economy rather than fewer.
Last month, Rep. Steven Horsford (D-NV) proposed a bill that eliminates the current $2.13 federal subminimum wage for tipped workers, which has been in place since 1991 — longer than many tipped workers have been alive. That bill would exclude tips from federal income taxation, but not from payroll taxes, for hospitality and service providers.
How do these Congressional bills line up with presidential candidates’ campaign proposals on this issue?
Nevada Rep. Horsford’s bill is consistent with Vice President Kamala Harris’ Opportunity Economy agenda to increase income for hospitality workers and exclude tip income from federal income taxes.
VP Harris has suggested guardrails for this exclusion, such as income limits and targeting only hospitality workers to mitigate abuse by non-tipped workers who may try to recharacterize their income as tips to evade federal taxation. If non-tipped workers try to abuse this exclusion — which they could with the other two bills pending before Congress — the exclusion will undermine the goal and cost many more billions of dollars than already projected. Depending upon the scope of the tip exclusion, the cost has been projected to be $100 billion to $250 billion over 10 years. Nationwide tipped workers receive about $38 billion in tips annually across the U.S.
Former President Trump hasn’t provided any specifics regarding his proposed tip exclusion.
VP Harris’ detailed Opportunity Agenda, available on her website, focuses on ensuring a living wage for all workers — including elimination of the long outdated $2.13 subminimum wage for tipped workers. Tipped workers tend to be lower-income and among the most economically vulnerable citizens having to rely on discretionary compensation. With higher minimum wages, these workers will be less reliant on tips, which is by definition income that is paid at customers’ discretion.
If tips are excluded from taxation, one might expect employers to suggest to employees that lower or no wages and more discretionary tips are tax advantageous. This could exacerbate, rather than remedy, income inequality issues hospitality workers face and may result in more service providers being paid with discretionary tips by customers rather than through guaranteed wages paid by employers. Exclusions of certain types of wages from taxation are rare and unusual because of goals of horizontal equity (similarly situated income earners whether tipped or not should be taxed the same).
Economists, service workers, and others have cited potential drawbacks of tip exclusion proposals — can you outline a few?
Policy issues with the proposed tipped exclusions are multifold.
1) About 40% of tipped workers do not pay any federal income tax and therefore these proposals will not help them. Additionally, many tipped workers don’t report all of their tips and therefore this exclusion might not provide as much of a benefit as expected because they have already effectively excluded their tips from taxation.
2) There’s the risk of abuse by non-tipped workers. The IRS is already underfunded and more audits of aggressive tipped income exclusions will cost all taxpayers and hurt working families who often don’t have access to CPAs and lawyers. Meanwhile, high-income individuals retain lawyers to take advantage of vague and ambiguous laws. This could further increase the already astronomical tax gap (the difference between what is owed under law and what is paid by taxpayers). Most of the tax gap is a result of high-income individuals not paying their fair share of federal income taxes.
3) Exclusion of tipped income could decrease tax refunds for tipped workers by reducing their Earned Income Tax Credit and/or their Child Tax Credit (both of which rely on a taxpayer’s reported earned income).
4) Eliminating tips from payroll taxes could reduce workers’ Social Security and other retirement benefits which depend on earned income.
5) Eliminating tipped income from taxation could reduce unemployment benefits that rely on historic wage income.
6) Eliminating tipped income from taxation could reduce individuals’ ability to borrow because lenders rely on reported tax data when determining loans. If tips become a larger percentage of income, lenders might be concerned about the high level of discretionary income for borrowers.
And customers could be affected, too. The U.S. is somewhat exceptional compared to other countries where employers — rather than customers — pay a portion of service providers’ compensation. A trend toward more tipped income rather than less could result in exacerbating income/wealth inequality, where those with the capacity to tip significantly enjoy the benefits of not only good service, but any service, and those that don’t have the capacity increasingly are not served well or at all and have to go without or self-serve.
Given existing pay differences between Nevada and other service workers, what unique impact might the “no tax on tips” proposals have on Silver State employees?
Nevada hospitality workers are more likely to report their tipped income because they are more likely to work for large employers that have entered into Tip Compliance Agreements with the IRS.
A Tip Compliance Agreement generally means that the employer agrees to gather data to document the amount of tips earned for every category of employee (e.g., valet, cocktail waitress, poker dealer, room service, maid), and then to report this amount of tipped income on each of these employees’ W2s, and to withhold federal income and payroll taxes on the same amount. The resulting percentages have to be approved by the IRS. This is often a negotiation where worker unions get involved. At least 75% of the employment base has to opt into this tip reporting and those that opt out must self-report their tips. By entering into these types of agreements, the IRS agrees not to audit workers’ tipped income (though, obviously, this does not apply to any workers who opt out).
What is most important about these discussions on tips and taxation that Nevada’s strong unions have brought into focus nationwide is that hospitality and service providers must be at the table for discussions about income/wealth equality and tax fairness rather than on the menu. With many provisions in the Tax Cut and Jobs Act scheduled to sunset at the end of 2025, these workers and their leadership have found their voice and are getting the overdue attention they have earned. We should expect that tips and taxation will be one of many tax issues to be negotiated in Congress in 2025.
