UNPACKING THE “NO TAX ON TIPS” ACT:
TIPPING CULTURE AND WORKER WAGES

The increasingly complex tax code may have an added level of complexity thanks to a proposed tax plan related to tipping—an increasingly hot topic in current American culture. The “No Tax on Tips” plan, originally proposed by former President Donald Trump, has also been backed by Vice President Kamala Harris. Both presidential candidates have incorporated the “No Tax on Tips” proposal as part of their respective campaigns with promising to eliminate taxes on tips if they win.

At present, tip workers constitute a small fraction of the U.S. workforce, around 2.5%. Within this group, about one-third of tip earners do not make enough to be required to pay taxes. Critics of the “No Tax on Tips” proposal claim it is a gimmick that could ultimately provide certain individuals with the opportunity to evade taxes.

Critics of the proposal further see it as a distraction from the real issues plaguing the working class. The federal minimum wage stands at $7.25 an hour and has not been raised since July 24, 2009. Critics use this information as a basis to argue that a greater positive impact would be made by expanding the Child Tax Credit and Earned Income Tax Credit, rather than creating the “No Tax on Tips” program. Senator Ted Cruz of Texas championed introducing the No Tax on Tips Act to the Senate floor in July 2024. The bill allows for a 100% deduction on tipped wages at tax filing by exempting “cash tips”—whether received in cash, by credit or debit card, or through checks—from federal income tax. A companion bill has also been introduced in the House.

From a cultural perspective, the No Tax on Tips Act could make waves in the already controversial tipping culture in the U.S. Since the COVID-19 pandemic, many Americans have felt that tipping culture has spiraled out of control, while service workers have been pushing for higher tips in response to inflation. A decade ago, tipping was largely expected only for waitstaff and bartenders, but now it seems that tipping options appear with almost every purchase, often presented through iPads. Critics argue that this proposed legislation will encourage employers to offload wage burdens onto customers and potentially pressure workers to push for tips more aggressively. On the other hand, customers knowing tips are not taxed may sway them to tip less.

In conclusion, the No Tax on Tips Act, while conceptualized to provide tax relief for tip earners, raises several counter-concerns. A primary concern being that while this concept would benefit a small portion of the American workforce, the attention it has garnered may distract from broader-impact issues, such as stagnant wages and the need for broader tax credits. Additionally, the proposed plan may have the effect of exacerbating existing tensions in tipping culture by inadvertently creating an incentive for employers to shift wage responsibilities onto customers and increase an already exhaustive pressure to tip on purchases. As legislative bodies deliberate this proposal, its broader economic and cultural impacts warrant careful consideration.