Harris and Trump want to scrap taxes on tips. That appeals in Michigan—but there may be a better option

During a sleepy lunchtime at Slow’s Bar BQ in the Corktown neighborhood of Detroit, servers discussed the idea of eliminating taxes on their tips, a proposal floated by both presidential candidates. “We already don’t get paid a minimum wage, and we just keep on getting taxed so heavy,” said Mylikka Phelps. “There were times I was behind this bar on a Monday morning, and I’m surprised I walked out with $50. And that $50 is getting taxed.”

A mile away at the MGM Grand Detroit casino, blackjack dealer Tracy Dedmon echoed the same sentiment, adding that eliminating taxes on tips would help her day-to-day finances. “We’re really not getting the full benefit of tips,” she said. “Every time I go to the grocery store I’m just like, wow, I’m done. Everything is 50 cents to a dollar higher.”

On the surface, eliminating taxes on tips is a welcome policy for service workers at a time of high living costs. Both Donald Trump and Kamala Harris have made it a flashy component of their economic platforms for the 2024 election. But while it sounds appealing, economic experts and worker advocates say it’s not good policy.

Instead, they prefer an alternative strategy: scrapping the subminimum wage, the hourly pay for tipped workers that’s generally less than 30% of the federal minimum wage. Harris supports eliminating it, but it can be a hard sell. That’s a dynamic visible right now in Michigan, which is set to start phasing out its subminimum wage within months. Still, it’s a sticking point even among struggling workers, who fear reduced tips in the face of a powerful restaurant lobby.

The policy: Appealing, but with flaws

“No taxes on tips” has become something of a campaign buzzword, and enticing in the same way broader tax cuts are. “The soundbites are attractive, no doubt,” says Steve Rosenthal, senior fellow in the Urban-Brookings Tax Policy Center, and a former White House economist. But he says it’s poor tax policy.

Just 4 million Americans earn tips, or about 2.5% of the working population. Even within the service industry, the proposal to eliminate taxes on tips focuses narrowly on front-of-house servers in bars or sit-down restaurants, not bussers and dishwashers. Notably, waiters in high-end restaurants handling sizable checks would benefit considerably more than servers at places like roadside diners.

Some say high-income earners in different industries could theoretically start reconstituting their income to make it tippable, such as investment bankers replacing performance fees with “tips.” Accounting for this gaming of the system, one estimate suggests the policy’s price tag would be $150 billion to $250 billion in its first 10 years. “When we think about tips, we conjure up some hard-working waitress who’s trying to make ends meet,” Rosenthal says. “The problem is, when you formulate tax policy with one image in mind, you often miss your target and help those you do not intend to help.”

In the meantime, it might not help the people it purports to: More than a third of tipped workers don’t earn enough to pay federal income tax in the first place.

Harris’s and Trump’s plans differ somewhat. Harris’s suggests some guardrails, including a $75,000 income limit and eliminating just income taxes, not payroll taxes, which go to Social Security and Medicaid. The Trump campaign, which was first to put forth the idea, hasn’t proposed any such stipulations. “Trump’s plan really is four words: no tax on tips,” Rosenthal says. “And like so much Trump, it’s all about the bluster and the soundbite.”

Some servers are skeptical or see through the one-dimensionality of the plans. Sarah Raita, a server at the Warren, Michigan, branch of National Coney Island, a chain of casual diners, doesn’t trust the idea. “I’m more than happy to pay my share of taxes—that’s part of being an American,” she says. “If I’m not being taxed, why? What are you trying to take away from me?”

Elijah Meisse, a bartender at Paramita Sound, a listening bar in downtown Detroit, admits his first thought was: “Absolutely, hell yeah.” But he quickly saw the flaws. “I do think that it’s a Band-Aid,” he says on a busy Sunday that brought in many excited Lions fans before the first game of the season. “I think it’s skirting around paying a livable wage. The minimum wage in Michigan is not a livable wage.”

The alternative: Good, but with misconceptions

Minimum wage in Michigan is $10.33, but service workers there, as in most of the U.S., earn only the tipped minimum wage—$3.93 in Michigan (and $2.13 federally). They rely on tips for the majority of their income. The system is unique to the U.S. (and is a legacy of slavery). “It’s a very normalized, acceptable form of wage subsidization,” says Rohani Foulkes, who owns a restaurant in Michigan, Folk Detroit, but grew up in Australia. “I find it to be quite odd.”

Eliminating the subminimum wage, as seven states have done, would be a more direct and effective solution, says Rosenthal. (When Michigan’s law goes into effect, it will be the eighth.) Harris has added this to her economic plan. And in September, Nevada congressman Steve Horsford proposed the TIPS Act, a legislative bill that lays out a framework for both policies; he’s also serving as a Harris campaign cochair.

Worker advocates say this would be the real key to helping tipped individuals. “We believe [servers] should be on par with minimum wage,” says Chris White, Michigan director of Restaurant Opportunities Center, an organization focused on improving restaurant workers’ lives. The group was pivotal in fighting for the Michigan law that raised the minimum wage and eliminated the subminimum wage, the first of its kind east of the Mississippi. It was finally approved this July after a six-year legal battle that went to the state’s Supreme Court.

The increases will start going into effect incrementally in February 2025, when the subminimum wage will rise from $3.93 to $5.99; by 2030, it will equal the state’s minimum wage. (Meanwhile, the state’s minimum wage will keep rising, from $10.33 to $12.48 next year, to $14.97 in 2028.)

But for a policy that experts overwhelmingly view as beneficial, it has had a hard time gaining favor with the workers themselves.

Many believe that customers aware of wage hikes will be less willing to tip generously, if at all. “That’s essentially taking us on busy nights from making $35 to $45 an hour, down to $12,” says Alisha Baldwin, at Slow’s Bar BQ, who earns the state’s subminimum, $3.93, but likes the tips more than the prospect of a stable wage. But it’s not one or the other: There’s no evidence that shows customers reduce their tips in the states that have eliminated the subminimum wage.

Others worry that if servers do continue to get good tips on top of a higher wage, it could create friction between front and back of house. “You got a server who just runs the food to the table making upwards of $40 an hour,” says Moe Smith, the manager at that Warren branch. “Now your cooks want more money, then your cashiers want more money, and you literally will just price yourself out of business.”

Justin Winslow, president and CEO of the Michigan Restaurant & Lodging Association, argues businesses would lose profits, pointing to a 2022 survey from the group that suggested one in five Michigan restaurants would shutter right away, while more than half would lay off staff.

Saru Jayaraman, president of national advocacy group One Fair Wage, says it’s common for such industry associations to sow fears into workforces by repeating unproven narratives: of decreased tips, disharmony between staff, and shuttering restaurants. “It’s all lies, it’s all misinformation, it’s all gaslighting,” she says.

Contrary to the industry’s narratives, a 2023 Siena poll showed 80% of voters support ending the subminimum wage. One Fair Wage data suggests that tips weren’t any lower in the seven states that eliminated the subminimum wage, and that restaurant sales are actually higher in those states—perhaps because higher minimum wages all around improves the population’s spending power.

White says there’s no proof that tips would change. “You show me a customer who buys a $200 bottle of champagne or a $72 butterfly steak and then when it comes time to tip says, ‘Oh, how much do you make’?” He says the change would be even more meaningful at the lower-end eateries. “When you get into the Coney Islands of the world, that extra wage is the difference between whether they pay their light bill or their water bill.”

As for employers, while it might hit budgets at first, he says it would ultimately help increase morale among workers, retain staff, and bring in more employees—a boon for the industry.

The Reality: What it would take to become law

While industry groups and businesses are still fighting Michigan’s wage legislation, they tend to like the no taxes on tips plan—including Winslow. Still, he says ending the subminimum wage would counteract it.

Others view the industry’s support for no taxes on tips as a distraction from real change—such as raising the minimum wage—and an easier sell to struggling employees. “There’s a push from business owners who are amassing most of the capital,” says Meisse, the bartender. “They probably think no tax on tips is great, because their service workers are not going to ask for an increased hourly rate.”

As well as serving as a justification to keep paying lower wages, Rosenthal says, further encouraging the tipping economy could exasperate consumers, already fed up with more ubiquitous tipping.

Any federal policy change to eliminate taxes on tips would need to go through Congress, and there has been some movement on that front. In addition to Horsford’s TIPS Act, likely the template for Harris’s plan, there’s a rival Republican-led bill from Ted Cruz and three colleagues.

Still, Rosenthal believes the likely high cost of such a plan will ultimately “discourage additional support.” He says that even though the move to eliminate the subminimum wage has been contentious at the state level, it may actually be easier to implement in Congress, because the relative budget burden would be “negligible.”

Subminimum wage legislation would be preferable to advocates, but whatever the case, they’re happy service workers are finally getting some attention. “For the first time in my 22 years of organizing, these workers are being elevated in the context of a presidential campaign,” Jayaraman says, adding that it’s high time, given that things have long been out of balance for this population. “There is a unique horror that tipped workers experience that should be addressed.”