LOUISVILLE, Ky. (WDRB) -- Both presidential candidates are campaigning to eliminate taxes on tips, however the idea has some polarizing reactions in Kentucky.

Catherina MacDowall is the owner and operator of Naïve Bar + Kitchen in Louisville's Butchertown neighborhood. With more than 20 years in the industry, and once a server herself, MacDowall knows the value of a good tip.

"Tips are what you rely on, not that paycheck of $2.13 an hour," MacDowall said Wednesday.

Naïve Bar and Kitchen

Naïve Bar and Kitchen in Louisville's Butchertown neighborhood. (WDRB photo)

Former President Donald Trump has campaigned for several months to eliminate tax on tips for service industry workers. Days ago, Kamala Harris' campaign also proposed an end to the tax.

Neither candidate’s team has said whether it would exempt tips only from income taxes, payroll taxes or both.

For workers, a blanket exemption would mean more take-home pay. And for the federal government, it could mean larger budget deficits.

"Nothing (a tip) is guaranteed," MacDowall said. "I think to eliminate the strain of federally taxed tips would just be like a huge relief."

The Kentucky Restaurant Association includes more than 1,000 restaurant industry workers. In a statement, president Stacy Roof said:

"We support the No Tax on Tips Act, which has been introduced in both houses of Congress. It creates a 100% income tax deduction for the tip portion of their income, but employees and employers would continue to make their FICA contributions on all of their income. FICA contributions are essential for employees' futures."

MacDowall also believes the relief could create more retention in the restaurant industry. She said it's a positive thing as she prepares to expand Naïve's hours starting next week. In turn, she said it would help employees and the city of Louisville.

"Having that extra money in your pocket could lead to so many things," she said. "It could lead to more local spending, it could lead to having (more) local businesses." 

Joshua Pinkston is an associate professor of economics at the University of Louisville. He described the campaign promise as making "zero sense" and its impact is "ambiguous." 

"For a politician, it's smart to say. From a policy perspective, it's not at all smart," Pinkston said.

Pinkston said other than creating less federal tax revenue, a blatant promise to not tax tips could have unintended consequences.

"Whenever you have a policy that kind of distorts how people might be paid, or what the price of something might be. It has some hidden cost to it," he said.

The Committee for a Responsible Federal Budget, a nonpartisan fiscal watchdog group, has estimated that exempting tips from both income and payroll taxes would reduce federal revenues by $150 billion to $250 billion over the next decade.

The committee said exempting tips from taxation would also lead employers and workers to reclassify wages as tips where possible. The more that happens, the more that federal deficits would increase.

A 10% increase in tips, for example, would bump up the committee’s projection for lost federal revenue to a range of $165 billion to $275 billion over the next decade.

Another concern from some, is employers taking advantage of the tax exemption and finding ways to make employees' wages tip-based.

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