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tipped minimum wage
No Tax on Tips Is a Deceptive Ploy; Congress Should Raise the Minimum Wage Instead
Over the next 10 years, the Raise the Wage Act would have a total benefit to affected workers of $700 billion, compared with about $39 billion from “no tax on tips” in the House bill.
Jun 22, 2025
At President Donald Trump’s direction, Congress is considering proposals to exempt tips from taxable income.
After Trump floated this gimmick on the campaign trail, Republican and Democratic elected officials alike have embraced the idea. The House Republican budget bill (H.R. 1) includes a “no tax on tips” provision that gives the illusion of helping lower-income workers—while the rest of the legislation hands huge giveaways to the rich at the expense of the working class. The Senate recently passed a standalone version of no tax on tips that similarly provides the false impression of aiding workers while giving employers excuses to incentivize tipped work and keep base wages low.
In stark contrast to “no tax on tips,” which excludes workers with the lowest incomes, the largest benefits of the Raise the Wage Act would go to the lowest-paid workers.
If the Trump administration and its allies in Congress genuinely wanted to help tipped and lower-paid workers, there are far better options they could pursue, like raising the federal minimum wage. To illustrate this, we compare the estimated impact of no tax on tips with the Raise the Wage Act of 2025, a bill that would raise the federal minimum wage from $7.25 to $17 an hour by 2030 and gradually phase out the tipped minimum wage. Here is an overview of how the two plans compare.
How Many Workers Would Be Affected? How Long Would Benefits Last?
No tax on tips: Between 2.5 and 5.2 million tipped workers would receive an income tax deduction over the next four years, but benefits would end after 2028.
The Raise the Wage Act: Nearly 23 million workers, including 2.8 million tipped workers, would earn higher wages with no end date—meaning affected workers would continue to benefit indefinitely.
How Much Would These Workers Benefit Annually? How Would Benefits Differ Based on Income?
No tax on tips: Eligible tipped workers would receive an average annual tax cut of $1,700 for the four years it would be in effect. However, the benefits would heavily skew toward higher-income tipped workers. Among all tipped workers, the top 20% would receive an average tax cut of $5,768 while those in the bottom 20% would only get $74 on average. The average for the bottom quintile is small in large part because two-thirds of those workers have incomes so low that they do not pay federal income taxes and thus will not see any tax benefit.
The Raise the Wage Act: Affected workers who work year-round would receive an average wage increase of $3,200 per year. After taxes, the net pay increase would be marginally smaller but still significantly larger than what a worker would receive on average with a tax deduction on tips. In stark contrast to “no tax on tips,” which excludes workers with the lowest incomes, the largest benefits of the Raise the Wage Act would go to the lowest-paid workers.
Who Pays for These Benefits?
No tax on tips: The public writ large would pay. House Republican lawmakers are already proposing massive cuts to social programs, such as Medicaid and food stamps that benefit millions of people (including tipped workers), to offset foregone revenue from no tax on tips and large tax cuts for the rich. The Republican plan would also dramatically increase the federal debt, which could substantially raise borrowing costs for households and businesses in the future.
The Raise the Wage Act: Employers of low-wage workers would pay for these wage increases, absorbing the higher labor costs over time through a variety of channels. Importantly, the Raise the Wage Act not only increases the federal minimum wage but also phases out the tipped minimum wage, a system that has provided employers of tipped workers an enormous—and highly problematic—public subsidy for decades.
While no tax on tips would benefit only the small share of workers who receive tips as a portion of their compensation, the Raise the Wage Act would benefit all low-wage workers in the U.S., including 4.2 million people with incomes below the poverty line. Over the next 10 years, the Raise the Wage Act would have a total benefit to affected workers of $700 billion, compared with about $39 billion from “no tax on tips” in the House bill (see Figure A).
As we at Economic Policy Institute and others have noted, no tax on tips is problematic for a variety of other reasons, aside from its paltry and poorly targeted benefits. The measure that passed in the House caps eligibility to workers in certain tipped occupations earning less than $160,000 in annual income. This will mitigate tax avoidance by the highest earners, but it does not fix other problems, including the fact that ending taxation of tips would likely expand employer use of tipped work—a system already rife with discrimination and worker abuse. No tax on tips would also undercut efforts to raise worker compensation while depleting tax revenue for public services. By subsidizing the use of tipping in the federal tax code, no tax on tips would further cement a system that lets employers off the hook from paying their workers a fair wage—in this case, forcing taxpayers to foot the bill. In contrast, the Raise the Wage Act gives workers a durable wage increase paid for by those who should be paying—their employers.
Beyond raising the minimum wage, there are several other effective and more equitable policies to support working families—including expanding the Earned Income Tax Credit and Child Tax Credit, providing workers with paid sick leave and paid family and medical leave, and supporting workers’ rights to form and join unions. But Trump and congressional Republicans, while claiming to support workers, have not pursued these policies. Instead, they have relentlessly attacked workers, and pushed an enormous tax cut for the wealthy—paid for by cutting essential social programs for low-income people and children and adding trillions to the public debt. As many as 16 million people would lose their health insurance under the House budget bill.
The Raise the Wage Act is by no means an outlier or a radical exercise in messaging—it’s cosponsored by majorities of House and Senate Democrats. If even a few Republicans were willing to support it, it could easily have the votes to pass. No tax on tips, on the other hand, remains a deceptive ploy that would provide few benefits to workers and fail to offset the harm the Republican budget bill would impose on millions of workers and families.
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Michigan Governor Accused of 'Wage Theft' for Signing Tipped Minimum Wage Legislation
"Once again, Democrats have thrown working people under the bus, this time in Michigan," said one critic.
Feb 21, 2025
Economic justice advocates excoriated Michigan Gov. Gretchen Whitmer on Friday after the Democrat signed legislation that, while speeding up the state's increase to a $15 hour minimum wage, could leave tipped workers earning less than they would under a system imposed last year by the state Supreme Court, according to critics.
Whitmer signed a pair of bills changing the state's minimum wage, tip credit, and paid sick leave law following an eleventh-hour legislative compromise, explaining in a statement that "Michigan workers deserve fair wages and benefits so they can pay the bills and take care of their family, and small businesses need our support to keep creating good jobs."
Abigail Disney, a member of the group Patriotic Millionaires, said in a statement, "Once again, Democrats have thrown working people under the bus, this time in Michigan under the stewardship of Gov. Gretchen Whitmer."
"In its quest to rebrand itself and win back the working-class vote, Democrats needed to present a unified front in this pivotal moment in Michigan—and anything less than that, which this is, should be taken as an abysmal failure," Disney continued.
"This is the unfortunate but predictable outcome of a party that has proven itself over the years to be for sale to the highest bidder. Voters will definitely notice, and Democrats shouldn't expect them to forgive and forget at the polls in 2026 and beyond," she added.
In 2018, advocates drafted ballot initiatives aimed at expanding paid sick leave and raising the state minimum wage, which was then $9.25 an hour. But Republican state lawmakers moved to block the measures by maliciously adopting and then favorably amending them. Last July, Michigan's Supreme Court ruled this "adopt and amend" tactic unconstitutional and ordered the initial sick leave and minimum wage proposals to take affect at midnight on Friday.
By signing one of the bills, S.B. 8, Whitmer leaves in place a system in which tipped workers' minimum wage will be $4.74 instead of $6 under the court-ordered plan. Customer tips are counted upon to close the gap between the tipped and regular minimum wage of $12.48 per hour. Employers must pay the difference if workers don't reach that amount with tips.
While the Michigan Restaurant and Lodging Association welcomed Whitmer's move, John Driscoll, author of Pay the People! Why Fair Pay Is Good for Business and Great for America, said in a statement that "restaurant lobbyists in Michigan may say that they 'won' this battle in preserving the subminimum wage for tipped workers, but in the end, their efforts will only hurt themselves and their state's economy."
"I know from my own experience as the CEO and chair of businesses that pay people stable and fair wages that doing so is best for workers, businesses, and the broader economy," he continued. "When workers have economic security, they are more loyal and productive, which will help businesses and stimulate growth."
"Contrary to what restaurant associations may claim, everybody lost today when Gov. Whitmer signed S.B. 8 into law," Driscoll added. "Tipped workers lost. Businesses lost. And the Democrats lost too when they sacrificed the most vulnerable workers in Michigan to lobbyists."
The advocacy group One Fair Wage accused the governor of "stripping millions of dollars" from Michigan workers' paychecks.
"Michigan's highest court ruled that these wage increases should take effect," One Fair Wage president Saru Jayaraman said in a statement. "Michigan workers have already earned this raise, and taking it away is not a compromise—it is wage theft. We are mobilizing to ensure voters—not politicians—have the final say on whether these protections remain in place."
One Fair Wage said: "If enough valid signatures are collected, S.B. 8 will be blocked from implementation, and the 2024 Michigan Supreme Court decision requiring that all workers receive a raise to $15 an hour with tips on top will go into effect. The referendum will thus ensure that Michigan voters—not politicians—decide whether these wage increases stand."
One Fair Wage must gather 223,099 valid signatures to suspend S.B. 8 and leave the matter up to Michigan voters.
Meanwhile, the federal tipped minimum wage remains stuck at $2.13 an hour, where it's been since 1991. The federal minimum wage has been $7.25 since 2009.
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No Taxes on Tips? There Are Better Ways to Help Low-Wage Workers
Raising the federal minimum wage and ending the subminimum wage for tipped workers are good places to start.
Aug 30, 2024
With the race for the White House heating up, a curious policy idea appeared seemingly out of nowhere: ending federal taxes on tips. While this policy shift may have wide appeal—most people aren’t going to say no to a tax cut—it would not translate into real benefits for workers struggling to make ends meet. In fact, it could do harm, and it may even deliver a new tax perk to the rich.
“No taxes on tips” makes us think it would benefit certain workers: the restaurant server pulling a double shift to pay the rent or a member of the cleaning staff at a major hotel chain. Surely these workers deserve better—and what could be better than giving them a chance to save on their tax bill?
It’s not so simple. For starters, tip workers make up a small fraction of the U.S. workforce—about 2.5%—and more than one-third of them do not even earn enough to pay income taxes in the first place. Cutting the federal tax does nothing for this group, except reduce the amount that they contribute to Social Security. Some of these workers could also lose out on other vital programs, like the Earned Income Tax Credit.
While there are still almost no details about how a tax-free tips policy would work, there is the very real possibility that wealthy earners would take advantage of any new system to shield their earnings from federal income taxes.
There are better options than a poorly designed “no tax” gimmick that leaves behind the majority of tipped and other low-wage workers. To win better pay for workers, we could start with raising the 15-year-old $7.25 federal minimum wage to at least $15 an hour. This would provide a more significant boost; about 1 in 8 workers earn less than $15, and most are in the states that have a $7.25 minimum wage.
What’s worse, tipped workers may be paid a subminimum cash wage by their employer that is as low as $2.13 per hour, an amount frozen in place in 1991 at the federal level. This is designed to benefit employers, not workers; the $5.12 difference between the federal minimum and subminimum wages is known as the “tip credit.” In effect, this is the portion of workers’ wages subsidized via customer tips.
These tip credits across the United States are at least $9 in nine states, and more than $11 in Delaware and Maryland. They represent enormous wage subsidies to employers for each and every hour a tipped worker works. It’s no wonder that consumers are showing signs of being “tip-tired”—it is past time to phase this policy out.
While there are still almost no details about how a tax-free tips policy would work, there is the very real possibility that wealthy earners would take advantage of any new system to shield their earnings from federal income taxes. Without adequate safeguards, some high earners would simply reclassify a portion of their income as tips. This would represent one more avenue for the wealthy to avoid paying their fair share.
Historically, the tipping economy has always been about denying workers a fair wage. It is a practice that dates back to the feudal systems of the Middle Ages and the post-Civil War period here in the United States, when white employers used it to deny formerly enslaved Black workers a fair wage for their labor. Today, tipped workers are often forced to deal with unexpected fluctuations in pay and scheduling and often lack access to employer-provided healthcare, paid sick leave, or holiday pay.
There are plenty of policies that would improve the lives of low-wage workers—raising the federal minimum wage, for starters, and ending the subminimum wage for tipped workers is a good place to start.
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