Jessie Chen | Spring 2025
The “No Tax on Tips” proposal has gained considerable attention during the election. It was embraced by both presidential candidates, particularly as a strategy to win Nevada, a swing state with the highest proportion of tipped workers (Bell 2024). After the bill was introduced in the House of Representatives, President Trump reiterated this commitment in a January 2025 speech in Las Vegas, aimed at relieving rising costs for service workers by allowing them to retain more of their earnings. Originating in England in the sixteenth century, tipping culture in commercial enterprises did not become prevalent in the United States until the late 1800s (Azar 2003). By the twentieth century, tipping had become very common, and today, American workers rely on tips as a primary income source more than European workers. Many discussions have sparked among economists on whether the “No Tax on Tips” Act is merely a campaign promise or an actual beneficial policy. Although the idea of tax-free tipping sounds appealing, it is not an efficient means of supporting low-income workers. It not only raises the budget deficit and exacerbates horizontal inequity but also diverts attention from the more pressing issue of eliminating the sub-minimum wage.
In terms of efficiency, many experts argue that the “No Tax on Tips” Act is unlikely to achieve its intended goal of aiding low-income workers for two reasons. First, its coverage is too limited to address the broader population of low-income workers. According to the Budget Lab at Yale (2024), tipped occupations only accounted for less than 4% of low-wage employment. Secondly, many tipped workers already have no federal income tax liability. Approximately 37% of tipped workers earned so little that they faced no federal income tax in 2022, even before accounting for tax credits (Tedeschi 2024). These findings suggest that the direct impact of the bill is probably weaker than claimed, especially when many tipped workers would not benefit from income tax exemption on tips if they already paid no taxes.
Beyond effectiveness, the proposal draws concerns about fiscal burden. As the University of Pennsylvania’s Wharton School of Business (2025) estimated, removing taxes on tips would increase the U.S. budget deficit by $69 billion over the next decade starting in 2025, assuming strict deduction to workers employed in specific leisure and hospitality sectors. The calculation accounts solely for income tax losses and assumes payroll taxes—taxes that are funded for social insurance programs like Social Security and Medicare—remain unchanged, as no additional details have been provided yet. If the bill also exempts payroll taxes on tips, a much higher budgetary cost is expected, with The Budget Lab at Yale (2024)’s estimation of $195 billion over the same period. If the government chooses to continue issuing bonds to cover the shortfall, it could force the Federal Reserve to monetize debt and consequently fuel inflation.
Exempting tips from taxation breaks horizontal equity, making tipped and untipped workers with the same income face disparate tax liabilities. Horizontal equity is the principle that individuals with similar earnings should face similar tax burdens. According to economist Vanessa Williamson of the Urban-Brookings Tax Policy Center, an exemption would be unfair if, for instance, DoorDash drivers can frequently receive tips while UPS and Amazon delivery drivers cannot (Bell 2024). This creates an inequitable distribution of income among workers in similar positions. Moreover, it introduces distortion in the labor market. When a dollar earned through salary is taxed but a dollar earned in tips is not, it incentivizes workers to gravitate toward tipped occupations purely for tax advantages. Over time, it introduces the possibility for matriculate calculation to avoid taxation. Therefore, horizontal inequity is worsened in this case, as the unequal treatment isn’t based on a progressive tax code with adjustments for family size or substantive economic differences in income type.
Furthermore, the attention on the tip taxation detracts from the more pressing issue of ending federal sub-minimum wages, a policy that allows employers to pay workers who receive tips less than the federal minimum wage. Tipped income is highly unstable, fluctuating from season to season and from shift to shift. While the federal minimum wage was last revised to $7.25 per hour in 2009, the federal tipped minimum wage has been locked at $2.13 since 1991. When adjusted for inflation using the 1991 and 2024 Consumer Price Index (CPI-U) from the U.S. Bureau of Labor Statistics, the real value of sub-minimum wage has experienced approximately a 56.6% decrease. This significant erosion highlights the urgent need to update the subminimum wage to match the inflation. Notably, raising the sub-minimum wage does not have a significant negative effect. Allegretto (2013) finds that increasing sub-minimum wage boosts earnings without reducing employment for tipped workers in full-service restaurants, which employ more than 60 percent of the tipped workers population (as cited in Allegretto and Cooper 2015). This suggests that eliminating the federal sub-minimum wage would reduce income vulnerability associated with tipping fluctuations and possibly yield a net gain for workers who currently struggle to reach the federal minimum wage through tips. Therefore, compared to exempting tax on tips, adjusting the federal sub-minimum wage is a much more urgent and effective policy priority for improving the economic well-being of low-paid tipped workers.
This analysis has a few limitations. First, it is true that horizontal inequity worsens at the lower income percentile end, but its aggregate impact on closing overall income inequality across the country is less visible, since higher-income groups contribute a larger influence to the metric. Second, in the federal sub-minimum wage argument, I assume that consumers’ tipping behavior remains unchanged following the introduction of the tipping tax exemption. This is based on the belief that consumers’ tipping behaviors are primarily driven by service quality and longstanding cultural norms. Additionally, qualifying the net gains of ending sub-minimum wage remains unclear due to the insufficient data on (1) the size of newly taxed workers who are currently below the federal income tax threshold but would face a net income loss if their earnings exceeded the threshold post-reform, and (2) the size of newly benefited tipped workers whose current earnings are near the federal minimum wage but would experience a net income gain following the reform.
In conclusion, the “No Tax on Tips” proposal remains a contentious topic that requires careful evaluation. Many experts argue that the proposal has limited effectiveness in supporting low-income tipped workers, exacerbates horizontal equity, and overshadows the more necessary and urgent elimination of the federal sub-minimum wage. In fact, there appears to be a lack of a clear policy rationale for the tax exemption, making it an arbitrary tax break rather than a deliberate economic policy. Additionally, it is still unknown what stage the act is in the legislative process. While it has been introduced in the House and Senate, it has not yet progressed past the committee stage. If the policy moves forward, many critical questions remain unresolved regarding the budget and effectiveness. The policy design has to be cautiously structured with clear specifications on details and targets to avoid backfires.
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Allegretto, Sylvia A, and David Cooper. Rep. Why It’s Time to Give Tipped Workers the Regular Minimum Wage. Washington, D.C: Economic Policy Institute, 2014.
Azar, Ofer H. “The History of Tipping – from Sixteenth-Century England to United States in the 1910s.” SSRN Electronic Journal, 2003. https://doi.org/10.2139/ssrn.397900.
Bell, Aaron. “No Tax on Tips: Law, Politics, and Economics.” University of Cincinnati Law Review Blog, September 24, 2024. https://uclawreview.org/2024/09/24/no-tax-on-tips-law-politics-and-economics/.
Bureau of Labor Statistics. “Archived Consumer Price Index Supplemental Files,” March 12, 2025. https://www.bls.gov/cpi/tables/supplemental-files/home.htm.
Buchanan, Vern, U.S. Representative. 2025. “Buchanan, Donalds Introduce No Tax on Tips Act with Cruz, Daines.” January 1, 2025. https://buchanan.house.gov/2025/1/buchanan-donalds-introduce-no-tax-on-tips-act-with-cruz-daines.
Penn Wharton Budget Model. 2025. “The FY2025 House Budget Reconciliation and Trump Administration Tax Proposals: Budgetary, Economic, and Distributional Effects — Penn Wharton Budget Model.” March 24, 2025. https://budgetmodel.wharton.upenn.edu/issues/2025/2/27/fy2025-house-budget-reconciliation-and-trump-tax-proposals-effects.
“‘No Tax on Tips’: Budgetary, Distributional, and Tax Avoidance Considerations.” 2024. The Budget Lab at Yale. September 2024. https://budgetlab.yale.edu/research/no-tax-tips-budgetary-distributional-and-tax-avoidance-considerations.
Tedeschi, Ernie. “The ‘No Tax on Tips Act’: Background on Tipped Workers.” The Budget Lab at Yale, June 24, 2024. https://budgetlab.yale.edu/news/240624/no-tax-tips-act-background-tipped-workers.