Senate-Passed No Tax on Tips Bill a 'Distraction From the Real Fight'

After the U.S. Senate on Wednesday unexpectedly passed a bill that would exempt some tips from federal income tax, one labor group that campaigns for raising wages warned that while the bill would offer moderate relief to some Americans, it does not address the poverty wages facing many in the service sector—a message the group has hit on in the past.

"For all the bipartisan celebration, this bill is a distraction from the real fight," said Saru Jayaraman, president of One Fair Wage, in a statement on Wednesday. "If Democrats want to offer a true alternative, they need to say it loud and clear: it's time to raise the minimum wage and end the subminimum wage once and for all."

The bill passed by the Senate on Wednesday, the No Tax on Tips Act, would establish a new federal tax deduction of up to $25,000 for cash tips reported to employers by employees for the purposes of withholding payroll taxes. Qualified cash tips include "any cash tip received by an individual in the course of such individual's employment in an occupation which traditionally and customarily received tips on or before December 31, 2023," according to the bill text. Employees who made more than $160,000 in the prior tax year are not able to claim the deduction.

Currently, for tax purposes, tips are treated the same as regular wages. The bill was cosponsored by a bipartisan group of lawmakers and was passed by unanimous vote. It will now go to the House.

The idea of getting rid of federal taxes on tipped wages was touted by U.S. President Trump on the campaign trail and then-presidential candidate Vice President Kamala Harris also embraced the idea.

An analysis published last year by Yale's Budget Lab found that a "meaningful share" of tipped workers already pay nothing in federal income tax and that tipped work is a very small slice of the labor market.

Less than 4% of workers in the bottom half of hourly wage jobs, people making below $25 an hour in 2023, are in tipped jobs. Thirty seven percent of tipped workers in 2022 made so little that they paid zero in federal income tax before factoring in credits, according to Yale's analysis, and for non-tipped occupations, the equivalent share was much smaller—only 16%.

A report from One Fair Wage released last summer found that the annual income of tipped restaurant workers was so low that 46% of them do not earn enough to pay income taxes based on their individual income.

According to analysis from the Economic Policy Institute (EPI), in addition to helping relatively few workers, exempting taxes on tips could potentially undercut pay for many more workers, would encourage tax avoidance, and would reduce pressure on employers to increase base pay, among other concerns.

According to One Fair Wage, the true relief from the country's affordability crisis will come through raising wages, not through "tax gimmicks."

"We cannot tax-break our way out of an economy that continues to pay people less than it costs to live," the group added.

EPI also calls ending taxation on tips "a distraction from proven methods for supporting low-wage workers, like raising the minimum wage and eliminating the subminimum wage for tipped workers."