Americans Are Tired of Tipping: Could Eliminating Taxes on Tips Make Things Worse?
In a recent campaign rally in Nevada, former President Donald Trump reiterated his pledge to eliminate taxes on tips, a proposal he initially introduced on the campaign trail. Speaking at the Circa resort and casino in Las Vegas, Trump promised to work with Congress to push the initiative forward.
“If you’re a restaurant worker, a server, a valet, a bellhop, a bartender, or one of my caddies. or any other worker who relies on tipped income, your tips will be 100% yours,” Trump declared.
Various industry groups, labor unions, and bipartisan politicians support the proposal. Economists and policy analysts have warned that getting rid of the tax on tips would be unfair, costly, and might end up affecting the majority of low-income Americans not at all.
While the concept is popular—one Ipsos poll found that 73% of Republicans, 75% of Democrats, and 73% of independents supported the proposal—a group of experts warned that the proposal may not be practical or effective. “This is just bad tax policy,” said Kyle Pomerleau of the American Enterprise Institute.
The Budget Lab at Yale University reports that 4 million Americans, or 2.5% of the workforce, were tipped employees in 2023. A large share of these workers already earn too little to pay federal income taxes. The Budget Lab estimates that families who benefit from the proposal would see an average tax cut of $1,700, while those in the lowest income bracket would save around $200.
However, the plan would result in a federal revenue loss of billions of dollars, projected to be more than $100 billion during the next decade, raising long-term questions about fiscal sustainability. The amount would depend on whether payroll taxes, which finance Social Security and Medicare, are also excluded.
Critics argue that the policy creates an uneven playing field. “If a cook and a waiter make the same wages, why should the waiter end up with a higher after-tax income?” Pomerleau questioned. Additionally, there are fears that eliminating taxes on tips could incentivize businesses to shift more employee compensation to tips rather than wages, exacerbating consumer frustration over tipping.
According to a 2023 report by Pew Research, nearly three-quarters of Americans feel tipping is expected in more places today than it was five years ago. The Urban-Brookings Tax Policy Center’s Joseph Rosenberg warned that businesses might introduce mandatory gratuities to capitalize on tax-free tipping.
This legislation would need congressional approval. Several such bills have already been introduced by lawmakers, including the No Tax on Tips Act, which has also garnered support from Nevada Democrats Sens. Jacky Rosen and Catherine Cortez Masto.
“This bipartisan bill will help assure tipped workers here in Nevada are able to keep more of their hard-earned dollars,” said Sen. Rosen, highlighting that service and hospitality industries account for about 20% of the state’s workforce.
Speaking for 60,000 hospitality workers in Nevada whom the Culinary Union represents, the union urged lawmakers to pass the bill but to eliminate the $2.13 federal minimum wage for tipped employees. Union leader Ted Pappageorge emphasized that addressing the two issues simultaneously would be the pathway toward equal pay.
Under the present bill, this exemption applies only to the “classically defined” tipped employee and then only to federal income taxes, but payroll taxes would be unaffected. Though this approach may cut the fiscal burden of the tax, Alex Muresianu of the Tax Foundation is unconvinced: “There’s no version of this policy that would improve the tax code overall—but some versions would be less problematic than others.
The implications of eliminating taxes on tips remain uncertain as the debate continues, with supporters championing worker benefits and critics warning of unintended consequences.
