Donald Trump’s Proposal to Exempt Tip Income from Federal Taxes

US Budget Watch 2024 is a project of the nonpartisan Committee for a Responsible Federal Budget designed to educate the public on the fiscal impact of presidential candidates’ proposals and platforms. Through the election, we will issue policy explainers, fact checks, budget scores, and other analyses. We do not support or oppose any candidate for public office.

Earlier this month, former President Donald Trump announced that, if elected for a second term, he would seek to exempt tip income from federal taxes.

We estimate exempting all tip income from federal income and payroll taxes would reduce federal revenues by $150 to $250 billion over ten years on a static basis and could reduce revenue significantly more once behavioral effects are incorporated.

At a June 9 speech in Nevada, President Trump declared “When I get to office, we are not going to charge taxes on tips.”

Under current law, tips are treated as ordinary income and subject to both federal income and payroll taxes, although tips are notoriously underreported and employers are subsidized for paying their share of the payroll tax on tips through a FICA tip credit.

Although the Trump campaign has not outlined its proposal in detail, we assume it would make tip income exempt from federal income and payroll taxes. On a static basis, we estimate this would reduce revenue by $150 to $250 billion between Fiscal Year (FY) 2026 through FY 2035, depending on how fast tip income grows and over what distribution of income it is concentrated.

Net Revenue Impact of President Trump’s Proposal to Exempt Tips from Federal Taxes

Sources: Committee for a Responsible Federal Budget, Internal Revenue Service, Tax Policy Center

This estimate is net of revenue gains from eliminating the federal FICA tip credit but does not include behavioral effects. In practice, exempting tip income from taxation would lead workers and employers to reclassify ordinary income as tip income where possible and could lead to a larger shift toward lower base pay and higher tipped income, more broadly. The magnitude of that behavioral effect is uncertain and would depend significantly on the regulatory guardrails that accompany the policy. As an illustrative example, if tips were increased by 10 percent, the policy would reduce revenue by $165 to $275 billion, and if they doubled it would increase deficits by $300 to $500 billion.

This estimate also assumes a current law baseline in which most individual provisions from the 2017 Tax Cuts and Jobs Act are allowed to expire, including the lower individual tax rates. President Trump has called for extending those expiring provisions if elected to a second term, which would reduce the fiscal impact of exempting tip income by between 10 and 15 percent, increasing deficits by between $125 and $225 billion.

To estimate this policy, we reviewed historic IRS data which showed reported tip income totaled $26 billion (0.16 percent of GDP) in Tax Year (TY) 2012 and more than $38 billion (0.19 percent of GDP) in TY 2018. Depending on how quickly tip income has grown since then and will continue to grow going forward, we estimate total tip income is likely to be between $700 and $900 billion from FY 2026 through FY 2035. From there, we estimated the effective marginal tax rate tipped workers are likely to face on their labor income, based on data from the Tax Policy Center.

Our high- and low-cost estimates reflect the range of possible tip income over the next decade along with a range of possible marginal rates. Our estimates assume a partial offset due to the effective elimination of the federal FICA tip credit, which is primarily meant to incentivize businesses to report all employee tips. However, we do not account for potential changes to various spending programs. These effects could be meaningful, but would in part depend on how tip income is counted for non-tax purposes.

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