"No tax on tips" will harm more workers than it helps [View all]

[Celerity]

Proposals in Congress and now 20 states could encourage harmful employer practices and lead to tip requests in virtually every consumer transaction

https://www.epi.org/blog/no-tax-on-tips-will-harm-more-workers-than-it-helps-proposals-in-congress-and-now-20-states-could-encourage-harmful-employer-practices-and-lead-to-tip-requests-in-virtually-every-co/

When President Trump proposed exempting tipped income from taxation during his 2024 presidential campaign, many viewed it as a politically expedient gimmick to win support among tipped service workers. Unfortunately, then-Vice President Harris soon followed suit, and since the election, a federal “no tax on tips” bill has been reintroduced and lawmakers in at least 20 states have proposed similar bills (see map below). Now that lawmakers in a multitude of states have supported the idea, it’s worth unpacking just how incredibly foolish and dangerous these proposals are. In summary, exempting tips from taxes would:

No tax on tips would help few low-wage workers, while potentially undercutting pay for more

Proponents of exempting tipped income from federal and state taxes have called the proposal a “lifeline” that will “deliver financial relief” and “put cash back in the pocket of a significant number of workers.” In reality, exempting tips from taxable income will help very few workers. First, very few low-wage workers receive tips. If you look at those earning less than $25 per hour, which is just less than half of the workforce, only 5.1% are in traditionally tipped occupations.

Second, many tipped workers already don’t pay federal income tax. According to researchers at the Brookings Institute, 37% of tipped workers “earn so little that they pay no federal income tax.” Similar trends often apply with state income taxes. For instance, families in Virginia earning less than $26,500 only pay 0.3% of their income toward income taxes. Moreover, exempting tips from taxation will lead to cases where low-income workers end up effectively losing income through losing eligibility to tax credits such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC).1

Among tipped workers who do owe taxes, the greatest beneficiaries of this proposal would inherently be those who are already the best off—i.e., those receiving the most tips. It makes no sense for lawmakers to give preference in the tax code to servers in expensive, high-end restaurants who are receiving large tips over a waitress at Denny’s struggling to make ends meet. Nor does it make sense to give tax preference to low-wage tipped workers over nontipped low-wage workers like a bank teller, a retail cashier, or a teacher’s aide. Efforts to raise pay for low-wage workers should focus on the level of earnings, not whether payment came as a gratuity.

Ending taxation of tips would benefit employers at workers’ expense..................

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