Editor’s note, May 21, 2025, at 9:50 am ET: The Senate has unanimously passed the “no tax on tips” bill. The bill will now head to the House. This article was originally published on August 13, 2024.
Why “no tax on tips” is a bad idea
The policy looks less like a pro-worker tax credit and more like a big business tax cut.
Abdallah Fayyad was a correspondent at Vox, where he covers the impacts of social and economic policies. He was the author of “Within Our Means,” a biweekly newsletter on ending poverty in America.
First, some good news: In an otherwise polarizing and divisive election, there’s at least one policy proposal that’s emerging as a unifying issue. The bad news is that most experts think it’s a terrible idea.
The proposal in question is to abolish federal taxes on tips. Donald Trump originally floated the idea at a campaign rally in June, and it gained enough traction that “No tax on tips” signs started making regular appearances at Trump campaign events and the Republican National Convention. Now, even his opponent Vice President Kamala Harris has endorsed the idea. “It is my promise to everyone here: When I am president, we will continue our fight for working families of America, including to raise the minimum wage and eliminate taxes on tips for service and hospitality workers,” she told a crowd over the weekend.
In a series of social media posts, Trump accused Harris of stealing his idea, saying that “she sounds more like Trump than Trump, copying almost everything.”
On the surface, exempting tips from being taxed might sound like a pro-worker proposal with populist appeal, potentially boosting take-home pay for service sector workers who rely on tips to make a living. But the policy doesn’t really hold up under any scrutiny. And that’s because at best, “no tax on tips” looks a lot less like a tax cut for low- and middle-income families, and a lot more like a subsidy for big businesses.
“I’m not at all saying that workers won’t get anything,” said Heidi Shierholz, president of the Economic Policy Institute. “But I think that a meaningful share of the [federal] expenditures on a tax exemption like this will go to the employers of tipped workers.”
That might be why industry lobbyists have backed the proposal. “It’s not a surprise that the National Restaurant Association loves this,” Shierholz said, referring to the lobbying group that represents many of the country’s major restaurant chains.
At worst, the tax policy might even put a downward pressure on service sector wages by allowing employers to keep their workers’ baseline pay low because the tax cut could instead raise the workers’ take-home pay.
“I think there is no question that it would” weigh wages down, Shierholz said. The only question, she says, is just how much.
So while “no tax on tips” might make for a good sound bite or campaign slogan, it doesn’t necessarily translate to wise policymaking.
Tipped workers don’t need a tax cut. They need a raise.
The problem with tipped wages is not that they are taxed too heavily; it’s how little they tend to pay, and how much tipped workers have to rely on the kindness of strangers to make ends meet. In 2023, for example, the median annual wage for waiters was just below $32,000, according to the Bureau of Labor Statistics.
In fact, as the Tax Policy Center put it, eliminating income taxes on tips would do little, if anything, for many tipped workers whose earnings are so low that they are already exempt from paying federal income taxes.
“It’s very hard to dispute that the vast majority of moderate and low-wage workers are left out,” said Brendan Duke, senior director of economic policy at the Center for American Progress. “We know that 95 percent of low- and moderate-wage workers don’t get tips, and only about a third of those tipped workers pay income taxes and would benefit from this.” (Duke was specifically talking about Texas Senator Ted Cruz’s proposed legislation on this issue.)
Part of the reason that tipped workers are paid so poorly is that the federal government only guarantees them a subminimum wage of $2.13 per hour. If along with tips, a worker’s earnings are still below the federal minimum wage of $7.25 per hour, then employers have to make up the difference. (Many states and municipalities have wage requirements above the federal minimum, but those also often include carve-outs with lower hourly minimums for tipped workers.)
That’s why a handful of states have abolished the subminimum wage for tipped workers altogether. Because by allowing employers to pay tipped workers less, businesses essentially pass their payroll burden directly onto their customers. And while most Americans are used to paying tips, those who don’t — or those who at least threaten to not tip — create a hostile environment for workers and make it harder for employees to make a fair wage. Some studies have also shown that tipped wages encourage workers to discriminate against people of color, providing them with worse service because of racist stereotypes about who is more likely to leave a generous tip.
Eliminating taxes on tips is a handout for businesses, not workers
One of the biggest concerns about doing away with federal taxes on tips is that it would discourage businesses from offering more competitive wages. That’s because if workers’ take-home pay increases because of a tax cut, employers wouldn’t need to provide tipped workers a higher base-line wage. In effect, it’s a tax cut that might mostly subsidize businesses’ payroll costs, not workers’ cost of living.
“It will reduce employers’ needs to raise wages,” Shierholz, of the Economic Policy Institute, said.
There’s also the fact that creating a tax carveout for tipped employees could create a major loophole for employers looking to pay people less. Some sectors, for example, can simply become part of the tipped economy, making more of their workers rely on tips rather than a minimum wage.
The policy would “incentivize employers to have more workers be in tipped occupations,” Shierholz said. “[Employers] could reduce the base wages they pay their workers under the guise of doing something for the workers. They could say, ‘We’re making you tipped because you won’t have to pay taxes’ and then in the fine print, it’s like, ‘Oh also, you’re going to be making $2.13 an hour in base wages.’”
That’s why pursuing other policies, like abolishing the subminimum wage, would do much more to increase workers’ pay than eliminating taxes on tips would. The poverty rate for tipped workers in states without a subminimum wage, for example, is lower than that in states with a subminimum wage.
“If you really want to help tipped workers, there are other ways that are far, far better,” Shierholz said, adding that federal dollars would be better directed toward programs like the Child Tax Credit or the Earned Income Tax Credit, which would be much better at targeting workers who need it.
So if politicians are looking to tout a pro-worker agenda, they should point to policies that can actually raise people’s wages, as Harris did by also endorsing raising the minimum wage. Otherwise, they might just be pushing for yet another tax cut for the rich. After all, that might be why major business lobbying groups have endorsed “no tax on tips” — to avoid actually raising workers’ wages.
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