Kamala Harris’s Plan to Exempt Tips from Taxes and Raise the Minimum Wage

This past weekend, Vice President Kamala Harris announced that, if elected President, she would seek to exempt tip income from federal income taxes and raise the federal minimum wage.

We estimate exempting tip income from federal income taxes and raising the minimum wage would increase deficits by $100 to $200 billion over ten years before accounting for changes in tipping behavior; the proposal could increase deficits more once behavioral effects are fully incorporated.

At an August 10 speech in Nevada, Vice President Harris declared, “When I am president, we will continue our fight for working families of America, including to raise the minimum wage and eliminate taxes on tips for service and hospitality workers.” Based on communications with the Harris campaign, tips would be exempt from the income tax but remain subject to the payroll tax under the proposal; the campaign also told the Washington Post that Vice President Harris would work with Congress to establish an income limit and various guardrails on the exemption of tip income from taxes.

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.

We previously estimated exempting tips from the income and payroll tax would reduce revenue by $150 to $250 billion between Fiscal Year (FY) 2026 and 2035. Revenue loss would be about half that size if tip income was only exempt from federal income taxes, and a little bit less if this exemption phased out for higher earners.

The current federal minimum wage is $7.25 per hour – or $2.13 per hour for tipped workers (their total minimum wage, inclusive of tips, is $7.25 per hour). Vice President Harris did not specify how high she would raise the minimum wage, though she has previously discussed a minimum wage of at least $15 per hour at the state level.

Raising the minimum wage would likely boost deficits by roughly $50 billion over a decade, though the deficit impact could be higher or lower depending in part on the details of her proposal.¹ Most significantly, an increase in the minimum wage would increase the cost of Medicaid and other federal health spending, as higher pay for low-wage health care workers would increase the cost of health care. A minimum wage increase would also reduce individual and corporate income tax collection and increase payroll tax revenue – mainly by reducing business profits and incomes for higher earners and boosting the taxable income of lower-wage workers.²

Taken together, we estimate these two changes would add $100 billion to $200 billion to the deficit between 2026 and 2035. This range partially reflects uncertainty on the deficit impact from exempting tips from taxes (explained here) and raising the minimum wage. The low-end estimate also assumes the tip exemption is phased out at higher incomes, while the high-end estimate assumes no phase out due to lack of detail. Estimates do not include interactions between the two policies, though we expect they would be small and highly dependent on certain details.

Deficit Impact of Harris Proposal to Exempt Tips from Taxes & Raise the Minimum Wage

Sources: Committee for a Responsible Federal Budget, Internal Revenue Service, Tax Policy Center, and Congressional Budget Office.

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. The Harris campaign has said they would restrict their tax exemption to “the leisure, hospitality, and gaming industries, where tipping is currently customary” and consider limiting the total amount of tip income that can be deducted in order to reduce gaming.

Still, some increase in tip income would likely occur. As an illustrative example, if tips were to increase by 10 percent, the deficit impact would rise $5 to $15 billion; if tips were to double, the deficit impact would rise by $70 to $125 billion.

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¹ In 2021, the Congressional Budget Office estimated a bill to gradually raise the minimum wage to $15 per hour, then index it, would increase deficits by $54 billion through 2031. In 2023, the Congressional Budget Office estimated a bill that gradually raised the minimum wage to $17 per hour, then indexed it, would increase deficits by $46 billion through 2033 on a conventional basis and $59 billion on a dynamic basis. The deficit impact of any new proposal through 2035 will differ due to changes in the economy, population, and budget window and would depend heavily on the details. 
² Raising the minimum wage would also meaningfully increase the cost of unemployment insurance benefits by increasing the number of unemployed workers. However, this would be largely offset over time as states raised their unemployment payroll taxes to cover the cost.