Harris, Trump see votes in not taxing tips. Experts see trouble.

The hottest topic in taxes this presidential cycle is pitting political strategy against the beancounters.

Over the weekend, Vice President Kamala Harris embraced the effort to eliminate taxes on tips for service and hospitality workers, after former President Donald Trump first proposed the idea in June. Both did so with an eye toward the key state of Nevada in the presidential election, which is teeming with tipped workers, especially in Las Vegas.

The idea has caught fire with those workers and the union that represents many of them. But economists on the left and right are sounding alarms about unintended consequences. Depending on how such a tax cut is structured, they warn, it could pile onto the already unsustainable federal deficit, ding Social Security and Medicare, and open a tempting loophole for high-end earners like financiers to recategorize their income to shield it from taxes.

“It’s one bad idea layered on top of another,” Howard Gleckman, a senior fellow at the Tax Policy Center, a nonpartisan research group, said to POLITICO. “There are not a lot of tax upsides.”

Given how close the election is shaping up to be, though, politics will almost certainly trump policy on the issue.

“It’s a large, large group of people that are being hurt badly,” Trump said during his speech at the Republican National Convention in July. “They make money — let them keep their money.”

Neither campaign has fully laid out how its plan would work. But congressional Republicans immediately introduced legislation to end the income tax on tips after Trump’s comments that quickly gained bipartisan support from all but one member of Nevada’s Democratic delegation.

Service sector workers are a bedrock of the state’s entertainment- and gambling-heavy economy and the union that represents most of those workers is a political force with few equals in organized labor.

Harris embraced the tip-tax idea shortly after getting the endorsement of the Culinary Union, which has pushed political allies to support the proposed exemption as well as to end the practice of paying tipped workers a lower minimum wage than other hourly employees.

"You can't address one without the other,” Ted Pappageorge, the secretary-treasurer of the union, said at a roundtable with other members last week.

Pappageorge also argued that Trump — who griped that Harris stole his idea — couldn’t be trusted to follow through on his vow to cut taxes for tipped workers, a line also used by other labor leaders.

“It's a serious issue. And so how do we take it from, you know, just some wild promises from President Trump to some actual reality with a serious issue?” he said.

Trump’s strategy, as in previous cycles, has been less about winning over union leadership than drawing support from rank-and-file members as well as non-union workers with whom Democrats have typically performed well.

The idea’s rocket ascent to the political mainstream has left experts scrambling to estimate its potential costs. The Committee for a Responsible Federal Budget estimated the plans could cost between $100 billion and $250 billion over a decade, depending on what they include.

The main GOP bill on the issue, introduced by Sen. Ted Cruz (R-Texas), only includes an exemption for income taxes.

It's unclear whether Harris or Trump intend to also exempt payroll taxes, which are shared by workers and employers. Doing so would put more money into workers’ pockets, but it could cost them later by hampering their eligibility for Medicare and Social Security.

It’s also unclear how much of a benefit a typical tipped worker would get. More than a third do not earn enough to pay federal income tax, and those who do typically pay relatively little, except for high-earners like waiters at Michelin-starred restaurants.

Policy experts from across the political spectrum have taken a dim view of a tax exemption for tipped income, almost from the moment Trump floated the idea.

Generally speaking, they argue that it’s a bad idea to give tax advantages to one sort of income — tips — over other kinds of wages. Giving preferential treatment to tipped income will, among other things, give workers making regular wages more of an incentive to try to reclassify their income as tips.

As with any potentially lucrative tax change, enterprising lawyers and financial advisers will also hunt for loopholes or windows to exploit.

Before Harris backed the idea, progressive groups particularly criticized the Cruz bill for not doing enough to prevent better-off white-collar workers from trying to pass off their wages as tips.

The Republican bill “contains few, if any, guardrails to prevent high-income professionals such as hedge fund managers from shifting their compensation to a tax-free tipping model,” wrote Brendan Duke of the Center for American Progress.

A Harris campaign official, who was not authorized to speak publicly, said that the vice president would work with Congress to include income restrictions and other guardrails to ensure a tip-exemption would not be exploited by the wealthy.

Others, like Gleckman, are more skeptical that the IRS would ultimately allow such gamesmanship, but still think there are a host of policies that would provide bigger benefits to tipped workers and others down the income ladder.

“If what you really care about is after-tax income of low-income workers … there’s a lot of other levers you could pull,” he said. “You could help all workers, rather than just this one slice.”

But business groups have been more receptive to exempting tips as an avenue to boost workers’ income over other vehicles that could raise their own costs, such as raising the minimum wage.

“The No Tax on Tips Act is sensible legislation that could provide tax relief for them and their families, putting more money in their pockets at a time when we're all feeling the squeeze of higher prices,” National Restaurant Association spokesperson Sean Kennedy said of the Cruz bill in a statement.

The Culinary Union has been careful to not position the tip exemption as a silver bullet, but rather one plank of several that would collectively improve workers’ lives in Nevada and nationally.

The hospitality industry “was crushed from Covid, and we're extremely thankful the economy's back,” said Pappageorge at the roundtable, before noting that workers were still dealing with inflation.

“These are the issues they're facing every day, and the taxes on tips and the sub-minimum wage — that is a working voter issue. It's right in line with that,” he added.

Megan Messerly and Lawrence Ukenye contributed to this report.