While this proposal aims to benefit working families, experts estimate that it could lead to a significant increase in deficits over the next ten years.

During a speech in Nevada on August 10, Vice President Harris emphasized her commitment to fighting for the interests of working families by advocating for an increase in the minimum wage and the elimination of taxes on tips for service and hospitality workers. The Harris campaign has revealed that, under their proposal, tips would be exempt from income tax but still subject to payroll tax. They also mentioned the intention to establish an income limit and other safeguards on this exemption, working closely with Congress.

Currently, tips are considered ordinary income and are subject to both federal income and payroll taxes. However, it is widely known that tips are often underreported, and employers receive subsidies through a FICA tip credit for their share of the payroll tax on tips.

Experts previously estimated that exempting tips from both income and payroll taxes could result in a revenue loss of $150 to $250 billion between Fiscal Year 2026 and 2035. This loss would be around half that amount if tip income was only exempted from federal income taxes, and slightly less if the exemption phased out for higher earners.

Furthermore, Vice President Harris did not specify the exact increment she would propose for the federal minimum wage, although she has previously discussed a minimum wage of at least $15 per hour at the state level. Increasing the minimum wage would likely lead to deficits rising by approximately $50 billion over a decade, with the potential for a higher or lower impact depending on the specific details of her plan.

The consequences of raising the minimum wage extend beyond deficits. It would increase the cost of federal health spending, such as Medicaid, due to higher pay for low-wage healthcare workers. Additionally, it would impact individual and corporate income tax collection by reducing business profits and incomes for higher earners while boosting the taxable income of lower-wage workers.

Taking these factors into account, it is estimated that the combination of exempting tips from taxes and raising the minimum wage could contribute an additional $100 billion to $200 billion to the deficit between 2026 and 2035. This range accounts for uncertainty about the deficit impact of exempting tips from taxes and the lack of specific details regarding the phase-out of the exemption for higher earners. It should be noted that these estimates do not include interactions between the two policies, which could have a small but significant impact depending on certain variables.

While Kamala Harris's proposal aims to support working families and improve their financial well-being, experts warn that it may have significant implications for the country's budget deficits. As the campaign develops and more details are revealed, it will be crucial to analyze the potential economic effects and weigh the benefits against the potential financial challenges brought about by these policy changes.