“The problem with tipped wages is not that they are taxed too heavily; it’s how little they tend to pay, and how much tipped workers have to rely on the kindness of strangers to make ends meet. In 2023, for example, the median annual wage for waiters was just below $32,000, according to the Bureau of Labor Statistics.
In fact, as the Tax Policy Center put it, eliminating income taxes on tips would do little, if anything, for many tipped workers whose earnings are so low that they are already exempt from paying federal income taxes.
“It’s very hard to dispute that the vast majority of moderate and low-wage workers are left out,” said Brendan Duke, senior director of economic policy at the Center for American Progress. “We know that 95 percent of low- and moderate-wage workers don’t get tips, and only about a third of those tipped workers pay income taxes and would benefit from this.” (Duke was specifically talking about Texas Senator Ted Cruz’s proposed legislation on this issue.)
Part of the reason that tipped workers are paid so poorly is that the federal government only guarantees them a subminimum wage of $2.13 per hour. If along with tips, a worker’s earnings are still below the federal minimum wage of $7.25 per hour, then employers have to make up the difference. (Many states and municipalities have wage requirements above the federal minimum, but those also often include carve-outs with lower hourly minimums for tipped workers.)
That’s why a handful of states have abolished the subminimum wage for tipped workers altogether. Because by allowing employers to pay tipped workers less, businesses essentially pass their payroll burden directly onto their customers. And while most Americans are used to paying tips, those who don’t — or those who at least threaten to not tip — create a hostile environment for workers and make it harder for employees to make a fair wage.”
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“One of the biggest concerns about doing away with federal taxes on tips is that it would discourage businesses from offering more competitive wages. That’s because if workers’ take-home pay increases because of a tax cut, employers wouldn’t need to provide tipped workers a higher base-line wage. In effect, it’s a tax cut that might mostly subsidize businesses’ payroll costs, not workers’ cost of living.
“It will reduce employers’ needs to raise wages,” Shierholz, of the Economic Policy Institute, said.
There’s also the fact that creating a tax carveout for tipped employees could create a major loophole for employers looking to pay people less. Some sectors, for example, can simply become part of the tipped economy, making more of their workers rely on tips rather than a minimum wage.
The policy would “incentivize employers to have more workers be in tipped occupations,” Shierholz said. “[Employers] could reduce the base wages they pay their workers under the guise of doing something for the workers. They could say, ‘We’re making you tipped because you won’t have to pay taxes’ and then in the fine print, it’s like, ‘Oh also, you’re going to be making $2.13 an hour in base wages.’”
That’s why pursuing other policies, like abolishing the subminimum wage, would do much more to increase workers’ pay than eliminating taxes on tips would. The poverty rate for tipped workers in states without a subminimum wage, for example, is lower than that in states with a subminimum wage.
“If you really want to help tipped workers, there are other ways that are far, far better,” Shierholz said, adding that federal dollars would be better directed toward programs like the Child Tax Credit or the Earned Income Tax Credit, which would be much better at targeting workers who need it.
So if politicians are looking to tout a pro-worker agenda, they should point to policies that can actually raise people’s wages, as Harris did by also endorsing raising the minimum wage. Otherwise, they might just be pushing for yet another tax cut for the rich. After all, that might be why major business lobbying groups have endorsed “no tax on tips” — to avoid actually raising workers’ wages.”
https://www.vox.com/policy/366680/no-tax-on-tips-trump-harris-subminimum-wage