Americans are tired of tipping. Experts say no tax on tips could make things worse.
Bailey Schulz, USA TODAY
5 min read
President Donald Trump in late January reiterated his pledge to end taxes on tips during a Nevada rally, echoing a campaign promise he debuted while campaigning there.
Speaking at the Circa resort and casino in downtown Las Vegas, Trump said he'd work with Congress in the ensuing weeks to get a bill on his desk.
"If you're a restaurant worker, a server, a valet, a bellhop, a bartender, or one of my caddies ... or any other worker who relies on tipped income, your tips will be 100% yours," Trump said.
Cutting taxes on tips has support from industry trade groups, the state’s largest labor union, and politicians on both sides of the aisle. Economists and policy experts, however, are less enthused, calling the idea unfair, costly and inconsequential to most lower-income Americans.
"No taxes on tips may have been a good political move to propose during the campaign, but it is certainly bad tax policy,” said Kyle Pomerleau from the American Enterprise Institute, a center-right think tank.
U.S. President Donald Trump attends an event about the economy at the Circa Resort and Casino in Las Vegas, Nevada, U.S., January 25, 2025.
Should taxes be taken out of tips?
Trump initially floated the idea of exempting tips from taxes on the campaign trail, saying he was inspired by a waitress at his Las Vegas hotel. It resonated with voters in the battleground state, which has the highest concentration of tipped workers in the nation, and Trump became the first Republican to win Nevada since 2004.
Advocates for workers and businesses alike have supported the idea.
At last month's rally, Rosanna Maietta, president and CEO of the American Hotel and Lodging Association, said the industry trade group would urge Congress to pass the proposal so hotel workers "can take home more of the pay that they earn every day."
The majority of Americans also support the idea: 73% of Republicans, 75% of Democrats and 73% of independents were in favor, according to an August Ipsos poll.
But in practice, no taxes on tips could be “messy,” according to Pomerleau, a senior fellow with the American Enterprise Institute.
A bill, with cash for the tip, left on a restaurant table in Los Angeles.
A small percentage of low-income Americans would benefit. Roughly 4 million people, or 2.5% of U.S. workers, were tipped in 2023, according to Yale University’s Budget Lab, a nonpartisan policy research center that analyzes federal policy proposals regarding the U.S. economy. More than one-third didn’t make enough money to pay federal income taxes to begin with.
The average tax cut for families who benefit would be roughly $1,700, according to the Budget Lab, while the bottom fifth of earners would save $200.
Meanwhile, the move could increase the federal budget deficit, with various estimates saying the plan would reduce revenue by more than $100 billion over the next decade. Lost revenue would vary, based on whether the proposal would exempt payroll taxes along with federal income taxes. Limiting the tax cut to certain industries or jobs also would reduce costs.
“Even though it’s not an enormous policy, $100-plus billion estimated over the course of 10 years is a good chunk of money,” said Alex Muresianu, a senior policy analyst at the Tax Foundation, a center-right tax policy think tank. “It’s a big policy for a small subset of the workforce.”
Pomerleau said the policy would be unfair to other non-tipped workers: If you have a cook and a waiter who make the same amount of money at the same workplace, why should the tipped waiter end up with the higher after-tax income?
There are also concerns the shift would push some employers and workers to restructure their pay to lean more heavily on tips, exacerbating the post-pandemic tipping fatigue that has swept the nation. Nearly three-fourths of Americans say tipping is expected in more places today than it was five years ago, according to a 2023 Pew report.
"We could see mandatory or required tips that are added on, especially in places like restaurants. Potentially we’ll see more of that as they try to shift more of the purchase price to look like a tip,” said Joseph Rosenberg, a senior fellow at the left-leaning Urban-Brookings Tax Policy Center.
Implementing the idea would likely require an act of Congress. Several lawmakers have already filed bills that would bar taxes on tips, including the No Tax on Tips Act co-sponsored by two Nevada Democrats, Sens. Jacky Rosen and Cortez Masto.
“This bipartisan bill will ensure tipped workers in Nevada can keep more of their hard-earned money,” Sen. Rosen said in a January news release. She called service and hospitality work – which makes up roughly 1 in 5 jobs in the state – the “backbone of our economy.”
The Culinary Union, which represents about 60,000 hospitality workers in Nevada, supports the bill but also called for an end to the $2.13 federal minimum wage for tipped employees.
"Taking on both issues is critical to ensuring one job is enough for workers to support their families," union secretary-treasurer Ted Pappageorge said in a January statement.
The bill would benefit only “traditionally tipped” employees and exempt tips from federal income tax only, leaving the payroll tax that funds Medicare and Social Security untouched.
Though such guardrails would reduce the budget cost, “I don't think there is a version of this policy that would, on net, be an improvement to the tax code,” the Tax Foundation's Muresianu said. “But I think there are versions of the policy that would cause fewer problems, or be less bad.”
This story has been updated to update a typo in a headline.
