Sen. Ted Cruz, R-Texas, introduced a bill Thursday, Jan. 16, that would make one of President-elect Donald Trump’s major policy proposals a reality: the No Tax on Tips Act. Cruz reintroduced a bill similar to the one he proposed last July.
This time, however, the bill has the support of Nevada’s two Democratic senators, making it a bipartisan proposal.
While the bill would change the federal tax code to allow people to claim a 100% deduction on income collected via tips from federal income tax, it would not exempt the money from being factored into other taxes, such as the payroll tax that gets withheld from workers’ paychecks.
Cruz said that “this bill is an important step to ensure we are addressing the economic needs of working Americans.”
Trump introduced the proposal on the campaign trail last year. His Democratic opponent, Vice President Kamala Harris, quickly adopted it.
But while Republicans, many Democrats and labor unions support the idea, economists aren’t sure it will have a positive effect.
One issue is that not many workers earn tips. Additionally, many of those who do don’t make enough to pay any federal income tax.
An analysis last summer by the Yale Budget Lab found that only 2.5% of American workers are in jobs where they earn tips. And that more than a third of tipped workers had incomes low enough to avoid paying any income tax.
Economists also raise questions about the fairness of promoting tip-based jobs like serving and bartending over other similar-paying jobs that don’t collect tips.
Conservative economist and former Republican-appointed Congressional Budget Office Director Douglas Holtz-Eakin criticized the proposals when they first gained traction. He wrote, “There is no particular reason to treat one kind of labor income differently than another,” and that “It is not an effective way to promote work.”
Should a “No Tax on Tips” bill pass, restaurant owners may hope it stops efforts to end the practice of tipping by evening out the minimum wage. The federal minimum wage for tipped workers is more than 70% lower than for non-tipped workers.
Eight states and the District of Columbia have passed laws eliminating or phasing out the gap between tipped and non-tipped workers in their state minimum wages.
However, a bill eliminating taxes on tips could lead workers to push for opportunities to make additional tax-free income.