During his 2024 presidential election campaign, Donald Trump was touting the idea of a “No Tax on Tips” Bill. However, many dismissed it as a political theater to appeal to the low-wage service workers rather than an actual policy push.
The bill picked up steam when then-Vice President Kamala Harris also put her weight behind the idea. Since the election, a federal “No Tax on Tips” Bill was introduced in the Senate, and lawmakers in more than 20 states have proposed similar bills.
Fast forward to Tuesday: the Senate passed the “No Tax on Tips” bill in a unanimous vote, making what once seemed like a gimmick a reality. The bill was introduced in January 2025 by Texas Senator Ted Cruz, with support from Democrats Jacky Rosen and Catherine Cortez Masto. The bill passed without any objections and now heads to the House, where it might become an act.
What Does “No Tax on Tips” Mean?
This is one of those policies that sounds as simple as they are. The “No Tax on Tips” bill aims to help workers who are paid the tipped minimum wage, also known as the “sub-minimum wage.” Under the bill, people earning a federal sub-minimum wage of $2.13 per hour will no longer be required to pay federal income taxes on the tips they receive from customers.
The vast majority of these workers are in the leisure and hospitality industry, like restaurant servers, fast food servers, bartenders, waiters, and other service staff. According to the BLS, more than 70% of workers employed in the hospitality industry earn less than the federal minimum wage. Another industry that is highly dependent on sub-minimum wage workers is the retail sector, think of Walmart or Target.
More broadly speaking, according to the Department of Labor, a “tipped employee” is anyone who makes over $30/month in tips, which extends to drivers, gig workers, and others who collect tips.
The “No Tax on Tips” bill would create a tax deduction worth up to $25,000 for tipped employees. However, it will be limited to cash tips that employers record for payroll tax filing. The bill would only apply to tipped employees who make $160,000 or less. The threshold will also rise to include more workers with the inflation rate in the coming years.
Why Some Love It and Others Can’t Stand It?
When Ted Cruz first announced the “No Tax on Tip” bill in June 2024, it earned massive support from the National Restaurant Association (NRA). The NRA is the largest lobbying group for the leisure and hospitality sector. The vice president of the lobbying group, Sean Kennedy, said in a statement that Ted Cruz proudly stamped on his website: “The ‘No Tax on Tips Act’ would provide immediate tax relief for more than 2.2 million restaurant employees and their families.”
So, why do some people, especially economists and think tanks like the Economic Policy Institute, believe the “No Tax on Tip” bill is flawed? When a lobbying group supports a policy, it’s usually bad for the average American. The “No Tax on Tip” bill might not be inherently harmful, but it is ineffective and could reduce pressure on employers to pay their workers fairly.
Who Really Benefits from the “No Tax on Tip” Bill?
The “No Tax on Tip” Bill helps very few minimum-wage workers. According to federal data, more than 50% of the American workforce earns less than $25 per hour. However, only 5.1% of low-wage workers are employed in a traditionally tipped occupation.
Additionally, the majority of the tipped employees don’t even pay any federal income taxes. For instance, 37% of the tipped workers in America don’t even make enough money to qualify for federal income tax. A similar trend is also seen with state income. In some states, like Virginia, families earning less than $26,500 only pay 0.3% in income tax.
The people who actually benefit from the “No Tax on Tips” bill are those already receiving the most tips, such as servers at high-end restaurants, bartenders in upscale bars, casino dealers, sommeliers in fine dining, or caddies at exclusive golf clubs. Why should the lawmakers prioritize these workers over a single mother working at your local McDonald’s?
Focus Should Be on Fair Pay, Not Tip-Based Income
The focus shouldn’t be on promoting the broken tipping culture; it should be on eliminating the tipped minimum wage altogether. Employers should be legally required to pay their employees at least the federal minimum wage of $7.25 per hour. Seven states in the US, such as California and Washington, have banned the tipped minimum wage.
The “No Tax on Tips” bill will likely increase pressure on consumers by encouraging more tip requests from employers. We also saw an increase in tip requests during the pandemic. Many businesses, like coffee shops and fast food restaurants, began pushing customers to tip more as part of the regular payment process. Businesses used this tactic to avoid paying their employees fairly. The trend could accelerate if tips were untaxed, as employers might guilt customers into footing the bill for fair wages.
The “No Tax on Tips” bill is nothing more than a distraction that diverts our focus from the proven methods that actually benefit low-wage workers. Policymakers should focus on raising the minimum wage, eliminating the sub-minimum wage, supporting pay and benefits standards, promoting unionization, and ensuring proper employee classification. Anything less than that is just a political gimmick.
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