No tax on tips? Michigan ruling may blunt Trump, Harris proposals

• Both Donald Trump and Kamala Harris have both proposed to eliminate taxes on tipped wages should they be elected president
• A recent decision by Michigan’s Supreme Court could eliminate tipped wages — and potentially upend tipping culture  — in coming years
• Economists are skeptical of both proposals, which were first pitched in Nevada, a state with a large number of service worker voters

LANSING — Both former President Donald Trump and Vice President Kamala Harris are touting similar plans to abolish taxing tips if elected president, but a recent Michigan court ruling threatens to limit the potential impact in the state.

A July state Supreme Court decision will phase out Michigan’s $3.93 per hour tipped wage within the decade – which could upend tipping culture in the state — unless lawmakers intervene before the ruling takes effect in February.

“If we don’t protect the tip credit, then that tax break’s not going to amount to much for us,” said John Sellek, spokesperson for Save MI Tips, a group fighting to preserve the state’s tipped wage system.

Sellek and others aligned with Michigan’s restaurant industry anticipate that restaurant customers are likely to limit or even cease tipping once the lower minimum wage is abolished, blunting the impact of any tax break.

But other observers urge patience and caution, noting that campaign promises by Trump and Harris are just that — promises that do not guarantee any policy change after the November election. 

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As questions linger about Michigan’s wage and sick leave laws following the blockbuster court ruling, state officials are seeking clarification from justices on how to implement their order, which calls for a $14.97 minimum wage by 2028.

Current Michigan law treats tips like ordinary income, subjecting them to both federal income and payroll taxes. Tips, however, are notoriously underreported and employers are subsidized for paying their share of the payroll tax on tips through what’s known as a “tip credit”.

Should Michigan ditch the credit, it would enter a minority of states who have already done so. Others include Alaska, California, Minnesota, Montana, Oregon, Nevada and Washington.

While the recent state Supreme Court ruling does not explicitly bar patrons from tipping, Sellek said many in the industry are skeptical of any benefit a potential presidential tax exemption could bring.

But such worries are premature, said state Rep. Laurie Pohutsky, a Livonia Democrat and Speaker Pro Tempore in the Michigan House. In states that have already dropped a lower tipped wage, she claimed tipping practices haven’t changed much, if at all.

“I think Michigan is a fantastic, special place,” Pohutsky told Bridge Michigan on Monday, “but it is not so special that it will completely buck the data that we have seen in every other state with this policy.”

The cost of presidential policies

The federal tipped wage is $2.13 per hour, nearly $2 less than Michigan’s current rate that is poised for elimination. Michigan’s current $10.33 per hour minimum wage also exceeds the federal minimum of $7.25.

Trump and Harris both rolled out their proposed tip tax exemptions in Nevada, a swing state that doesn’t have a lower tipped minimum wage but has a large service industry, particularly in Las Vegas, where workers expect tips.  

“When I get to office we are going to not charge taxes on tips,” Trump said in June, promising he’d make the change on his “first day in office.”

Trump has done little to expound on what his proposed policy would look like in practice — or whether tips would be exempt from both federal income and payroll taxes, which are used to fund Social Security and Medicare. 

Harris, too, this month promised to “raise the minimum wage and eliminate taxes on tips for service and hospitality workers.”

What that would mean for Michigan remains to be seen. 

Leisure and hospitality is Michigan’s sixth largest business sector, accounting for 430,300 jobs in June. Among them, around 281,000 are food service workers, with 48,380 people employed as servers and another 12,580 as bartenders, according to state labor data.

Trump’s plan to end taxes on tips is projected to cost the federal government between $150 billion to $250 billion over the next 10 years, according to the Committee for a Responsible Federal Budget (CRFB), a nonpartisan, non-profit fiscal group based in Washington, DC. 

The group estimates that Harris’ proposal would cost the country between $100 billion and $200 billion over that same span because her campaign has made clear she would not exempt tips from the payroll tax. 

More money, more problems?

Economists have been skeptical of the Trump and Harris proposals to eliminate tips, warning they could encourage workers to find creative ways to count larger shares of their income as tips, rather than standard wages.

The policy proposals could also “push tipped workers further into a world of income uncertainty,” Betsey Stevenson, a professor of public policy and economics at the University of Michigan, wrote earlier this month in a Bloomberg op-ed. 

The plans would not result in equal benefits for the country’s lowest-income workers, Stevenson added, noting 37% of tipped workers already don’t pay federal income taxes because they earn under $600 in weekly wages.

Tipped workers make up less than 5% of workers in the bottom 25% of earnings, according to data from the Yale Budget Lab. 

A fairer system, Stevenson suggested, would look more similar to what Michigan is doing: Raise the minimum wage and eliminate the smaller tipped wage nationally.

“If tips were just a small, optional gesture of gratitude, exempting them from income taxes might make sense,” she wrote. “But tips in America are often part of the wages that workers depend on.”

‘What good is that going to do us?’

Absent national consistency, Michigan could end up as an outlier, with workers benefiting less from any tip tax exemption than their peers in other states, said Sellek, the Save MI Tips spokesperson.

“Being in a state where there's no tip credit, and the idea of tipping doesn't really exist — or exists in a very limited form — sure, we’ll take the tax break,” he said. “But what good is that going to do us?”

Pohutsky, the Livonia Democrat, suggested it’s too soon to draw “bad faith” conclusions about Michigan’s new income tax policy because it has not yet been fleshed out. 

Calls for lawmakers to return to Lansing and work on a potential fix to the court’s decision have continued to grow in recent weeks, with business groups arguing the planned wage and sick leave changes will be overly burdensome and could cost the state jobs. 

Legislators, who haven’t met much this summer, will convene for session on Sept. 11. But majority Democrats have said little about what, if anything, they might do on wages or sick leave. 

Whatever solution legislators come to, Pohutsky said, the focus should first be on making sure “the system we have in Michigan is working with any federal level policy.” 

Should either Trump or Harris’ proposed tax exemption for tipped wages come to fruition, Michigan lawmakers should “reassess this policy and go from there,” she said. 

“In my mind, there’s nothing wrong with waiting to see what happens and adjusting course from there,” Pohutsky said. “That’s not a sign of bad leadership or bad policy, it’s just being adaptable.”