On the campaign trail, President Donald Trump sought to win over working-class voters in key swing states with a promise to exempt tips and overtime pay from federal income taxes.
“The hypocrisy comes because Republicans are giving a tax cut to tipped workers while decimating Medicaid,” said Martha McKenna, a Democratic strategist.
“They are giving tipped workers a small break and then punching them in the face with these health care cuts.”
Both tax exemptions are structured as deductions that workers would claim when they filed their taxes the following year.
The overtime exemptions could benefit workers in a variety of fields, like manufacturing, mining, construction and public safety.
During his campaign, President Donald Trump promised to exempt overtime pay and tips from federal income taxes in an effort to appeal to working-class voters in crucial swing states.
Despite some worries that the actions would increase the deficit and possibly cause labor market disruption, Congress is now getting closer to fulfilling that promise.
There are still several obstacles in the way of both measures. Before the bill is sent to the Senate, House leadership spent the entire Wednesday night mobilizing its members to approve a budget bill which includes a tax exemption for overtime and tips on Thursday morning. Following a unanimous Senate vote this week, the House will now need to consider a separate bill that would exempt tips—but not overtime—from federal income taxes.
First proposed by Trump during the campaign, the tax breaks have created a rare cross-party coalition of support, with some Democrats joining unions like the Teamsters and business associations like the National Restaurant Association in supporting the tax exemptions. However, economists and conservative think tanks have expressed concerns about how the exemptions would increase the deficit and possibly impact the labor market by favoring certain workers over others.
When Trump first proposed eliminating tip taxes, a number of prominent Republicans expressed skepticism to NBC News, pointing to the growing national debt and raising concerns about whether it would be equitable for those who do not receive tips.
The tax breaks, however, would give congressional Republicans a selling point to appeal to working-class voters in a larger budget bill that is also full of advantages for businesses and wealthier households now that Trump is in the White House. Approximately 75% of voters, regardless of party affiliation, support the removal of tip taxes, according to an Ipsos poll conducted last year.
“It feeds the constituency of a lot of our members, and honestly, it’s just a really good idea,” Sarah Chamberlain, head of the Republican Main Street Partnership, a moderate Republican organization, said. “The working class has left the Democrats and come over to the Republican Party, especially with Trump, because that’s who he appeals to.”. “I understand that some Freedom Caucus members are upset about this, but we can find other ways to save money so that we can support working women and men. “.”.
Although Democrats have generally favored the exemptions, Sen. Rosen, Jacky, D-Nev. In order to push the bill through the Senate, the party still intends to draw attention to other Republican budget cuts, such as cuts to food stamps and Medicaid, that might harm the same workers who stand to gain from the tax cuts.
According to Democratic strategist Martha McKenna, “The hypocrisy comes because Republicans are giving a tax cut to tipped workers while decimating Medicaid.”. “With these health care cuts, they are giving tipped workers a little reprieve before slapping them across the face. “..”.
The figures for overtime and tipped workers.
According to economists, the overall effect on the economy would be minimal, even though some workers would experience notable increases in their after-tax income. An analysis by the Yale Budget Lab found that about 12 percent of hourly workers work some overtime annually, and that tips account for between 2 and 5 percent of the workforce.
The Yale Budget Lab discovered that up to 40% of tipped workers already earn insufficient wages to be required to pay federal income tax on any of their earnings.
Ernie Tedeschi, director of economics at the Yale Budget Lab and former chief economist at the White House Council of Economic Advisers during the Biden administration, stated that this is a very small portion of the workforce that will benefit from this at all, but it does limit its cost. I believe that Congress is supporting it in large part because it is a highly visible victory and one of the less expensive ideas. Even though there aren’t many low-wage workers, you can still claim to be helping them. “.”.
Only federal income tax would be exempt, meaning that employees would still be responsible for paying any state or local taxes as well as Social Security and Medicare taxes on their earnings.
Both tax exemptions are designed to be claimed as deductions by employees on their next year’s tax return. Employers would continue to deduct tip or overtime tax payments from employees’ regular paychecks, but the money would be written off on their final tax returns when they filed their yearly taxes.
The exemptions from overtime could help workers in a number of industries, including public safety, mining, manufacturing, and construction. Among the unions endorsing the measure is the International Association of Fire Fighters, which described how staffing shortages frequently force its members to put in dozens of hours of overtime each month.
For fire fighters to be eligible for overtime compensation, they must already put in 53 hours per week. That is thirty-five percent more hours per week than the typical worker puts in. Edward Kelly, general president of the International Association of Fire Fighters, said in a statement that the proposal to remove overtime taxes would provide firefighters with significant relief, allowing them to keep more of their earnings while putting in long hours to protect their communities.
restrictions and financial expenses.
Limits on tip exemptions included in the House and Senate bills would make it more difficult for employers to try to manipulate the system, such as by making it more difficult to switch hourly or salaried workers to tip-based compensation. Additionally, the amount of tips that could be subtracted from an annual tax return would be limited to $25,000, and higher-income earners earning over $160,000 would not be eligible.
According to Alex Muresianu, a senior policy analyst at the Tax Foundation, a group that promotes tax policy reforms, “I believe the worst-case scenario from a budgetary cost perspective has been avoided, at least on that provision, by limiting it to traditionally tipped industries and excluding highly compensated employees.”. The budget might have been completely destroyed if tipping had been introduced to more occupations, but this limits the possibility of behavioral change. “”.
The federal budget would still incur costs as a result of the measures. The Congressional Budget Office estimates that the House budget bill’s overtime exemption would cost $124 billion in lost tax revenue when compared to current policy, and the tip tax break would lower tax collections by $40 billion.
Since the tax breaks would expire in 2028 under the current legislation, there would be political pressure to extend them in time for the presidential election that year. According to Brett Loper, executive vice president of policy for the Peter G. Trust, if the exemptions were extended past that point, the impact on the deficit could be even greater. This is likely given the political difficulty of raising taxes on workers who had been benefiting from the cuts. Peterson Foundation, which promotes debt reduction.
Loper, a former congressional and White House Republican, stated, “You’re making it harder for a more limited base to raise revenue, and from our perspective, the gaping hole that you have between revenues and spending, and the political appetite to keep the revenues low and the spending high, is creating sustained deficits.”. Our national debt is growing faster thanks to you, which we believe will have serious long-term economic repercussions. “”.
Additionally, opponents have claimed that the exemptions would unfairly divide the tax burden, favoring one group of workers over another without providing a clear explanation. For example, a janitor who receives an hourly wage would have a higher tax bill than a bartender employed at the same restaurant. Additionally, it might change the demand for overtime and tipped jobs, resulting in a labor shortage elsewhere.
If employers are able to extract more hours from their current workforce, lowering overtime taxes may also encourage more workers to put in extra hours, which could result in fewer jobs available overall in some industries.
Tedeschi stated, “Employers will eventually pay these workers a little bit less in wages than they otherwise would have, but workers receive a tax benefit.”. “With tips, the customer bears the financial burden instead of the employer or restaurant. Overtime will enable those employers to give their workers a slightly lower base salary or base pay. “”.
