South Carolina is one of 20 states seeking to eliminate state income tax collected on tips earned by the state’s service workers. (Stock photo by Phillip Rubino via Getty Images)
COLUMBIA — South Carolina legislators are seeking to eliminate state income taxes that waiters, bartenders and other hospitality workers collect through tips.
With bills filed in both the House and the Senate, South Carolina is one of 20 states considering such legislation following campaign promises made by both parties’ presidential nominees ahead of the November election.
“This bill is simply stolen from Donald Trump’s agenda,” Sen. Matt Leber, the Senate bill’s lead sponsor, explained to members of a Senate budget subcommittee Tuesday.
The Johns Island Republican went on to say the legislation is “wildly popular” in his Charleston-area district, where a large number of tipped hospitality employees make their living serving tourists.
The legislation is not industry specific and would apply to any kind of tipped worker, from hair dressers to golf caddies.
The concept has been popular with politicians and voters across the political spectrum.
At a rally in Las Vegas in January, Trump credited his campaign promise to end taxes on tips with his winning the swing state of Nevada in November.
“I’m a Republican, and I’ve never met a tax cut I don’t like,” Leber said.
But at the federal level, it has given national economists pause.
Researchers at the Brookings Institution argue these types of proposals would do little to help low-wage earners who pay very little in federal income taxes to begin with. Plus, only about 5% of the country’s lowest wage workers earn tips, according to the nonpartisan think tank based in Washington, D.C.
Researchers also say it could drop workers’ income so low as to make them ineligible for federal tax credits offered to low-wage earners and parents.
No one testified either for or against the bill at Tuesday’s hearing, but some senators raised concerns about how the system might be abused.
Sen. Tom Corbin gave the hypothetical example of a self-employed business owner who makes a deal to get paid for a job mostly through tips so as to circumvent paying taxes on a larger portion of their income.
“I’m all about reducing taxes, but I was just curious about how people might take advantage of it,” said the Travelers Rest Republican. “I’m always tasked with thinking about the odd outlier.”
Ultimately, the subcommittee did not take a vote.
Sen. Tom Davis, R-Beaufort, instead suggested the group come back at a later date with amendments to possibly limit which industries and workers may qualify, as well as penalties for anyone caught using the measure to evade taxes.
Identical “no tax on tips” legislation was introduced in the U.S. House and U.S. Senate in January but hasn’t gotten any traction yet.
Leber told the SC Daily Gazette he supports pursuing it at the state level without waiting for changes to the federal tax code, because he is not confident Congress can get it done in a timely manner.
Trump continues to say ending federal taxes on tips is a priority of his administration, but he can’t do that by executive order. It will take congressional approval.