Exempting Tips from Federal Taxes in Nevada

As the U.S. presidential election approaches, exempting tips from federal income taxes is gaining support.

Americans have long been known for their generous tipping habits, with U.S. tipping culture extending to more occupations and involving higher amounts than most other countries. However, this culture may soon become even more pervasive, but it could have unintended consequences for consumers and workers.

The COVID-19 pandemic saw increased tipping as Americans sought to support service workers during difficult times. Tip jars that once collected spare change began to be replaced by digital touch screens suggesting higher tip amounts, even for small transactions. The result has been an expansion of tipping expectations, with more people feeling pressured to tip in situations where it was previously uncommon.

A Pew Research Center survey from November revealed that 72 percent of U.S. adults believe tipping in more places than five years ago is expected. A WalletHub survey from February echoes this, where three out of four respondents expressed the view that tipping has gotten out of control. The psychological burden of determining when and how much to tip has only added to the frustration.

The proposal to exempt tips from federal taxes could simplify payroll for employers and reduce the discrepancies between reported credit card tips and unreported cash tips. However, it might also encourage more businesses to introduce tipping, expanding it to new sectors.

While Vice President Kamala Harris has suggested that the tax exemption would apply specifically to service and hospitality workers, the pressure to extend this benefit to other low-paid workers could be significant.

Critics argue the proposal is about securing votes in states like Nevada rather than addressing broader income inequality. A more equitable solution might involve increasing the standard deduction or expanding the earned income tax credit rather than creating a tax loophole that benefits only a specific group of workers.

Should the proposal be implemented, the loss of federal revenue would need to be compensated, likely leading to financial challenges in the future. However, this potential downside is unlikely to receive much attention as candidates focus on winning over voters in the upcoming election.