On the campaign trail, President Donald Trump was all about winning over working-class voters in key swing states by promising to exempt tips and overtime pay from federal income taxes. Now, Congress is getting closer to making that promise a reality, despite some concerns about how it could mess with the deficit and maybe shake up the job market a bit.
House leadership spent all day Wednesday trying to get its members on board to pass a budget that includes a tax exemption for tips and overtime before the legislation heads to the Senate. The Senate already passed a separate bill exempting tips (but not overtime) from federal income taxes this week, so now it’s the House’s turn to take it up.
The tax breaks that Trump talked about during his campaign have brought together an unusual mix of supporters, from unions like the Teamsters to groups like the National Restaurant Association, along with some Democrats. But not everyone is on board – conservative think tanks and economists worry about how these exemptions might add to the deficit and potentially mess with the job market by favoring some workers over others.
Not really sure why this matters, but when Trump first mentioned the idea of axing taxes on tips, some big Republicans weren’t too keen on it. They were worried about the growing national debt and whether it would be fair to workers who don’t rely on tips for income. But now that Trump is in charge, the tax exemptions could be a selling point for congressional Republicans looking to woo working-class voters with a broader budget bill that also benefits companies and higher-income households.
Although Democrats have mostly been in favor of the exemptions, they’re still planning to shine a light on other cuts in the Republican budget that could end up hurting the same workers benefitting from the tax breaks, like reductions to Medicaid and food stamps. The back-and-forth continues, with both sides trying to make their case.
The tax exemption on overtime in the House budget bill could lead to a loss of $124 billion in tax revenue compared to the current policy, while the tax break on tips could reduce tax collections by $40 billion, according to the Congressional Budget Office. The impact on the deficit could increase even more if the exemptions are extended beyond 2028, when they are set to expire.
The House and Senate bills do have some limits on tip exemptions to prevent employers from gaming the system. For instance, they make it harder to shift hourly or salaried workers to tip-based pay and exclude higher-income earners making over $160,000. There’s also a cap on the amount of tips that can be deducted from a yearly tax return.
While the tax exemptions could benefit some workers, there are concerns that they might not be as helpful as they seem. Only about 2.5% of the workforce are tipped workers, and about 12% of hourly workers clock some overtime each year. The exemptions could end up creating shortages in certain job sectors if workers are more willing to work overtime thanks to the tax breaks.
Not really sure if this is the best move, but the tax exemptions would only apply to federal income tax, so workers would still have to pay other taxes like Social Security and Medicare, along with state and local taxes. The exemptions are structured as deductions that workers claim when they file their taxes the following year, so employers would still withhold money for tax payments on tips or overtime.
