Trump Wants to Fulfill His ‘No Tax On Tips' Promise. The Details Get Tricky.
Several of the proposals that House Republicans have outlined in their expansive tax bill have drawn concern from the public and within the party itself. But one tax cut provision within the House majority's plan is receiving an unusual level of public, bipartisan approval — a rule to eliminate federal income taxes on tips.
'No Tax On Tips,' which was one of President Trump's most buzzy, populist campaign pledges in 2024, polls quite well. An Ipsos survey found roughly three in four Republicans, Democrats and independents were in support. The proposal, which would reduce federal revenues about $11 billion a year, currently appears likely to end up in whatever final bill moves through Congress and heads to the president's desk to be signed into law.
Tipped workers in the bottom 60 percent of the income distribution would receive an average tax cut of $1,260 if tips were excluded from income taxes. A broad chunk of restaurant workers and bartenders, a large share of hotel staff, barbers, salon workers, tour guides and delivery and Uber drivers are among those who most likely stand to benefit.
The policy push has created odd bedfellows. The National Restaurant Association, the powerful business trade group that often lobbies against minimum wage increases for workers, has been supportive of the policy for tipped workers, who are subject to a lower minimum wage than others in the vast majority of the United States.
Yet a unique mix of labor economists, budget hawks aligned with liberals and conservatives, and even some restaurant interest groups have come out against the No Tax On Tips idea.
'The Fair Labor Standards Act specifies that you can only receive tips if you are customer facing, so that means cooks, dishwashers, porters and bussers, in some cases, are all not receiving tips,' said Erika Polmar, the executive director of the Independent Restaurant Coalition, a group that represents the small and midsize market.
'What this means,' Ms. Polmar argues, 'is that servers are suddenly going to get a substantial tax credit, whereas cooks and such are not, and restaurants can't afford to just keep increasing minimum wages to make up that difference.'
If tipped workers at a restaurant make more than their colleagues who don't get tips, those workers could either demand more money or take up tipped-eligible roles themselves elsewhere.
That could put a significant amount of wage pressure on the service industry, Ms. Polmar said, at a time when many businesses in her coalition are worried about maintaining their profit margins, which are relatively low compared with other industries.
For some workers, though, the pressure that No Tax On Tips may put on restaurants to give greater compensation to everyone involved in the operation is a feature not a bug — even if it causes some headaches for managers and owners at first.
'My opinion on the whole No Tax On Tips thing is I'm working based on a salary of $2.50 per hour as a server, right? So it's me working my butt off for my tips; why are they taking money from me when I'm the one who is putting in the work,' said Chase Morales, a waiter, bartender and host, working in Midland, Texas. 'I'm still paying my taxes for my hourly wage,' he added.
The U.S. tax code has long been filled with different nooks and crannies that treat one type of business, or a certain form of income, more or less favorably than others. But several analysts at influential think tanks based in Washington oppose the Trump-led tips provision because it appears primed to add yet another special tax exemption.
'We're not a huge fan of doing tax policy that's just for one industry, having special sets of rules that advantage one industry over another,' said Alex Muresianu, a senior policy analyst at the nonpartisan Tax Foundation. But Mr. Muresianu acknowledged the 'market distortions' of the policies could lead to near-term gains for workers, as people potentially flock into 'tipped-eligible' roles to earn more take-home pay.
Still, the details of who exactly will benefit from the proposed gratuities tax break can get complicated.
'If a low-income taxpayer already has zero taxable income due to the standard deduction, the tip deduction would provide no additional benefit,' said Kyle Pomerleau, a senior fellow at the American Enterprise Institute, a right-leaning think tank. In other words, many lower-income Americans already owe nothing in federal income taxes (even though they pay local, state, sales and other taxes) and the No Tax On Tips provision, as currently written, will not give them any extra federal tax relief.
'It's more of a middle income benefit, not a low-income benefit,' Mr. Pomerleau said.
Putting aside potentially confusing details for tax filers, there is also the question of whether No Tax On Tips would lead to less pressure on employers to raise wages — not more.
Most employers in the leisure and hospitality industry are already granted the remarkably unique state subsidy of being allowed to pay workers a sub-minimum hourly wage by law. No Tax On Tips would extend another carve-out to them, Stan Veuger, a fellow at the American Enterprise Institute with Mr. Pomerleau, argued, because it would put less pressure on firms to raise pay when efficiency gains or higher sales lead to greater productivity.
But in an interview Mr. Veuger also acknowledged the straightforward outcome for most tipped workers, especially those who are single. For a tipped worker in any given American city, he said, 'If you make $60,000 and you do not have kids, it definitely benefits you.'
Brendan Duke, the senior director for federal budget policy at the Center on Budget and Policy Priorities, who previously served as a policy adviser in the Biden administration, sees flaws in the No Tax On Tips provision that mostly have to do with scale. To him, the tax cut amounts to an understandably popular but inefficient means of providing tax relief to working class households overall.
Mr. Duke and Mr. Veuger both said they would prefer a tax break for lower-income households that applied across the board, regardless of role, such as an increase in the earned-income tax credit.
House Republicans are 'touting this as their working class tax break and it just doesn't deliver a lot because the vast majority of working class folks don't work for tips,' Mr. Duke said. 'I think it mostly serves as a shield for all those trillion dollar tax breaks tilted toward wealthy people that cost a lot more.'
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