Tax Break on Tips Sparks Debate Over Wages and Labor Policies

Strategic Insights -

A bipartisan push to eliminate taxes on tips has sparked a heated debate among economists and labor advocates, with some arguing it could encourage employers to reduce hourly wages for workers. The proposal, which was passed by the Senate and included in a wide-ranging tax and immigration measure approved by the House, would give employees earning $160,000 or less in 2025 a tax break on up to $25,000 a year in tips. However, critics warn that it could perpetuate a system that allows employers to pay tipped workers as little as $2.13 an hour, and leave workers' pay subject to customer whims and disruptions.

Key Takeaways:

  • The Senate proposal would give employees earning $160,000 or less in 2025 a tax break on up to $25,000 a year in tips.
  • About 4 million U.S. workers were in predominantly tipped occupations in 2023, according to the Yale Budget Lab.
  • Nevada has the largest concentration of tipped workers among U.S. states, with many employed in the service industry.
  • The median hourly earnings for full-service restaurant waiters in the U.S. are $7 in wages and $20 in tips, according to a National Restaurant Association survey.
  • The no-tax-on-tips policy does not help back-of-house employees who don't get tips, or the estimated one-third of tipped workers who have no federal income tax liability because of low pay.
  • Some critics argue that the policy could exacerbate pressure on consumers to leave tips at a time when many are fatigued by tip requests at counter-service establishments and from gig workers.
  • Labor advocates warn that the policy could prompt more industries to argue their employees qualify for the reduced minimum wage, under the cover of granting them tax-free tips.
  • If the measure passes, the treasury secretary will draw up rules on what occupations qualify.
  • Some economists argue that the no-tax-on-tips policy could end up reducing hourly wages for workers, as employers take advantage of the tax break.

Statistics:

  • 4 million U.S. workers were in predominantly tipped occupations in 2023, according to the Yale Budget Lab.
  • The median hourly earnings for full-service restaurant waiters in the U.S. are $7 in wages and $20 in tips, according to a National Restaurant Association survey.
  • Restaurant workers who make more than $30 a month in tips can be paid a reduced minimum wage under federal law -- $2.13 an hour, compared with $7.25 for non-tipped employees.
  • If tipped employees don't reach the full minimum wage through their tips, the employer makes up the difference.

Sources:

  • Yale Budget Lab
  • National Restaurant Association
  • Economic Policy Institute
  • The White House
  • Sen. Jacky Rosen (D-Nevada)
  • Sen. Ted Cruz (R-Texas)
  • Robert Cherry, emeritus economics professor at Brooklyn College
  • Jacob Vigdor, University of Washington professor
  • Elizabeth Ananat, economics professor at Barnard College
  • David Cooper, director of state policy and research at the Economic Policy Institute