There’s a better way to help underpaid workers than “no tax on tips”

The No Tax on Tips Act was approved by the Senate on Tuesday with unanimous support, advancing one of President Donald Trump’s campaign promises. The proposal to eliminate federal taxes on tips for service and hospitality workers gained significant traction during the 2024 election and garnered bipartisan backing on Capitol Hill. While the idea seems popular due to its potential relief for lower-wage workers, it could actually benefit businesses more than employees, resulting in a loss of billions in tax revenue annually.

The policy could incentivize businesses to reduce workers’ wages, making them more reliant on tips, which is contrary to the needs of workers, especially those who rely on tips. While eliminating taxes on tips may increase take-home pay for some, it could also lead to income instability for workers who heavily depend on seasonal tips. The core issue for tipped workers lies in their inadequate wages, not excessive taxes, and exempting tips from taxation could hinder their Social Security benefits. Furthermore, many low-wage workers, particularly those not regularly receiving tips, would not benefit from this legislation. Therefore, addressing the subminimum wage might be a more effective solution to improve conditions for tipped workers.

The subminimum wage system, established in 1938 and later expanded to include tipped workers, has kept wages stagnant for service and hospitality employees for decades. While tipped wages are meant to supplement income, they often fall short of providing a livable wage. Advocacy groups like One Fair Wage have emerged to push for the elimination of the subminimum wage, which has proven to be a factor in higher poverty rates among tipped workers. States that have abolished this tiered wage system have seen reduced poverty rates among workers, highlighting the need for broader reform to improve wages and working conditions. Instead of focusing on eliminating taxes on tips, policymakers should consider raising the minimum wage and expanding tax relief measures to benefit all low-wage workers.