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No Tax On Tips Isn’t Very Pro-Worker

Turns out, the biggest pro-worker piece of Donald Trump’s proposed economic agenda isn’t very pro-worker after all.

On June 9, at a campaign rally in Las Vegas, Trump pledged to eliminate taxes on tipped income if he wins the White House again. It was a fitting pitch for the location, given that Nevada, a swing state in the upcoming election, has the highest concentration of tipped workers in the US. Since then, the proposal has taken on a life of its own and has essentially become one of the centerpieces of Trump’s economic policy agenda – along with, of course, the extension of his 2017 tax cuts. Trump’s team has been relentless in pushing the idea in the media, even going so far as to encourage supporters to put special “Vote Trump For No Tax On Tips!” stickers on their restaurant bills.

Capitalizing on the idea’s popularity, Senator Ted Cruz (R-TX) and Representative Byron Donalds (R-FL) have introduced legislation – the No Tax On Tips Act – in the Senate and House respectively that would exempt tips from federal taxation. The Senate bill would allow for a full deduction for tips in calculating income taxes, while the House version would exempt tips from both income and payroll taxes.

Trump and Republicans’ No Tax On Tips proposal might seem like a good idea on the surface, especially as it’s ostensibly targeted towards workers like hairdressers, bartenders, and servers who are predominantly low earners. (The median annual income for tipped restaurant workers is just $15,198 and nearly 90% of them make below the national median income.) But when you scratch below the proposal’s surface, you’ll find that it would actually provide no benefit to low-wage workers, almost no benefit to other tipped workers, and would open yet another door to tax avoidance by the wealthy.

To start, it’s worth recognizing that tipped workers make up a very small sliver of the US workforce. Ernie Tedeschi of the Yale Budget Lab estimates that, in 2023, there were 4 million tipped workers in the US, which is just 2.5% of the entire workforce. But beyond that, tipped workers also make up a relatively small portion specifically of the low-wage workforce, as Tedeschi found that tipped workers comprised less than 4% of all workers in the bottom half of the national earnings distribution. In short, this is to say, while it’s certainly good to provide tax relief to tipped, low-wage workers, the No Tax On Tips Act would not do anything whatsoever to help the other 96% of low-wage workers who do not work for tips, like cleaners, cashiers, and personal care aides.

Even worse, the No Tax On Tips proposal actually wouldn’t benefit a whole lot of tipped workers either. This is because many of them make so little money that they don’t actually have any income tax liability to benefit from a tax exemption on tips in the first place. According to a report by One Fair Wage and the Food Labor Research Center at the University of California, Berkeley, 66% of tipped restaurant workers would not benefit from the proposal because either they or their households don’t make enough to pay income taxes.

Lastly, to make matters even worse, the small handful of tipped workers that would benefit from exempting tips from taxes wouldn’t receive much relief. According to an analysis by the Center for American Progress, a married couple with two children making $20,000 in wages and $20,000 in tips would receive a $480 tax cut; meanwhile, restoring the American Rescue Plan’s expanded Child Tax Credit would give this same couple a $2,600 tax cut. Also, workers who would get a tax cut from Rep. Donalds’ House version of the bill, which exempts tipped workers from both income and payroll taxes, would ultimately get hurt, as their Social Security and Medicare benefits may be greatly reduced later in life.

So there you have it. Despite all of Trump’s and Republicans’ self-congratulatory fuss and fanfare over their No Tax On Tips proposal, the reality is that it wouldn’t benefit most low-wage workers and would potentially hurt some of them in the long term.

But that doesn’t mean that no one would win out from the No Tax On Tips proposal. Because just like with all of Trump’s and Republicans’ other tax plans, the biggest potential winner from exempting tips from taxes would be wealthy people like us.

As it’s currently written, the No Tax On Tips Act has no restrictions on which workers in which industries can deduct tips when calculating their tax liability, nor does it stipulate any sort of limit on the amount of tips that workers can deduct. This will inevitably open the door to high-income earners like hedge fund managers and lawyers recharacterizing their income as gratuities to take advantage of the tips deduction and receive a huge tax windfall. According to the above-mentioned analysis by the Center for American Progress, if a married couple making $1 million in wages manages to convert half of their earnings into tips, they would receive a whopping $180,000 tax cut.

We don’t blame any low-wage worker who supports Trump and Republicans’ No Tax On Tips idea. It sounds great on the surface, and some might actually see a small benefit in the short term. But at the end of the day, we believe that low-wage earners in America deserve more than what Republicans are offering with their latest bit of faux-populist rhetoric. And, of course, they deserve to receive relief without lawmakers simultaneously giving more tax avoidance opportunities to the wealthy.

The better alternative to eliminating taxes on tips is simple: raise the minimum wage, eliminate the subminimum tipped wage, and provide a cost-of-living income tax exemption that ensures no one pays federal income tax until they’re able to pay for their basic cost of living. The federal minimum wage has been $7.25 an hour since 2009, while the federal subminimum tipped wage has been $2.13 an hour since 1991. The MIT Living Wage Calculator estimates that the living wage – the actual wage needed to afford basic essentials – in the median state when income taxes are taken out of the equation is around $20 an hour, so it’s safe to say that the federal wage floor is completely and entirely insufficient. Here at the Patriotic Millionaires, we believe that all workers – tipped and non-tipped, and in every industry – should make enough money at one full-time job to survive.

We also believe that the subminimum tipped wage should be eliminated entirely. All workers, no matter their line of work, deserve to share in the profits that they help generate for their employers and to receive a stable source of income. No worker should have to rely on the unpredictable generosity of customers to make a living. Workers can and should have the opportunity to make tips on top of a stable, base wage.

If Vice President Harris and Democrats want to provide a better alternative to voters, they should look to Michigan as a role model. Last week, the Michigan Supreme Court ruled that Republican lawmakers in the state violated the state constitution a few years ago when they blocked two ballot measures that would increase the minimum wage. Now, thanks to their decision, the state’s minimum wage will rise to $15 an hour by 2028. Its subminimum tipped wage will also be phased out entirely by 2029, making it the first state in 40 years to proactively do so and joining seven other states in its sensible decision.

Democrats need to get the truth out about the No Tax On Tips proposal and how little it would actually help workers. But they can’t stop at just pointing out the flaws in Trump and Republicans’ proposal. They have to offer better solutions. And right now, judging by the excitement coming out of Michigan, there is no better or simpler solution than raising the federal minimum wage and abolishing the federal subminimum tipped wage. Only then will they prove that they are the real pro-worker party.