No Tax on Tips

No tax on tips is a strange direction that this election cycle is taking us. In June, former President Trump declared at a rally that he plans to end taxes on tips to benefit service industry workers. Immediately following this, Ted Cruz’s team drafted a bill to make tipped income deductible. That’s the entirety of the bill—no limits or restrictions. The same bill was later submitted to the House of Representatives. Instead of letting the idea fade quietly into the night, Vice President Harris announced at one of her rallies too will end taxes on tips, echoing Trump.

There are huge problems here. The idea, in its original form, means that anyone could deduct tipped income, not just people who work in service industries. This opens channels for abuse. For example, an account manager or lawyer could structure their business to be “tipped”. A spokesperson for Harris’s campaign said they would structure the bill so that it would have an income limit and strict requirements, but this leaves too much room for loopholes. It also ignores a couple of glaring issues.

Not every state relies fully on tips. Take Louisiana, for example. LA has no law that sets a tipped minimum wage, which means that servers in Louisiana receive minimum wage (with most establishments paying above the state minimum). A server in Louisiana would have to pay more taxes on their income than someone from another state with a subminimum wage. While it’s understandable that not every policy can be perfectly fair across the country, this idea of people not paying taxes on their income is fundamentally flawed.

The argument that tips and gratuities exist to reward people for their hard work is misleading. Tipping pays bills. Without it, servers make minimum wage with tip credit. (If a server were to make under minimum wage, the employer must pay to make up the difference.) Tips exist to shift the responsibility of paying employees properly onto guests, creating an odd power dynamic and a culture centered around tipping. Tipping does not create incentives for hard work either. Tipping often follows the lines of race, gender, and age and does not favor hard-working employees (it technically does, but the increase is a 1% difference).

No tax on tips seems like a good solution, but it’s a short-term fix to a long-term problem. The problem is twofold: tipped employees are not making the wages they deserve and are struggling in today’s economy, and there is a serious issue with “tipflation”—the rising expectation to tip in more and more situations. But there is a better solution: end subminimum wage and the tip credit.

One argument often presented against removing subminimum wage: people will tip less. This is the point of ending the tip credit. Instead of hiding the cost of labor, we pay it directly to employees. Servers often argue that they will make less money, or cooks will argue that paying servers what they earn in an hourly rate means that servers will be paid more than cooks. This is, again, the point. By showing that we need to pay servers ~$27 per hour to equalize wages, we also reveal that cooks and food service workers are severely underpaid. A trained, skilled position that is physically demanding and requires experience and/or schooling should not make barely more than minimum wage. Or perhaps minimum wage is far too low; any job that exists in the largest economy in history should pay a wage that can support any individual working full-time.

Most of the world does not operate with a tip-based economy. Restaurants pay their employees a living wage, offer vacation time, holidays, paid parental leave, and access to healthcare. For the most part, this doesn’t exist in the United States. Because benefits are not mandated at a national level, they are not offered, as they increase operating costs for restaurants. This has had serious consequences. In the hospitality industry, there is rampant substance abuse that has persisted for decades. Mental health issues are widespread—bartenders have double the average suicide rate, and for women in the industry, it’s triple. COVID-19 was a dark time for many, but especially for hospitality; the COVID death rate for the F&B industry was more than double the national average. The hospitality industry needs long-term solutions.

End the subminimum wage. Pay servers what they deserve for their time. Pay cooks what they deserve for their skills. Give benefits to the industry. Raise up a ravaged industry. Once this is achieved and servers don’t have to rely on goodwill and social pressure to support themselves, then we can talk no tax on tips.