House Republicans’ tax plan includes a ‘no tax on tips’ proposal. How many workers stand to benefit?
Budget battle showing cracks in GOP
Republicans are divided on the bill, arguing that cuts to popular social programs could impact voter opinions and their slim majority in the House.
House Republicans recently unveiled a sweeping tax plan that included a key promise from President Donald Trump’s campaign trail: no tax on tips.
Polling suggests it’s a popular idea across party lines, and Trump has credited the idea for aiding his 2024 election win. But critics argue that no taxes on tips is a costly, unfair tax break that will benefit few lower-income Americans.
“A relatively small number of workers are going to see any significant tax savings from this proposal,” said Joseph Rosenberg, a senior fellow at the left-leaning Urban-Brookings Tax Policy Center.
Here’s what we know so far about the latest proposal.
Who qualifies for no tax on tips?
The bill would create a temporary tax deduction through 2028 for employees and independent contractors in occupations that “traditionally and customarily received tips,” likely servers, for example. Should the bill pass, those occupations would be hashed out by the Treasury secretary.
Highly compensated workers who make at least $160,000 in 2025 would be ineligible.
How much would tipped workers save through no tax on tips?
Some tax policy experts have critiqued the idea because of its limited scope.
Kyle Pomerleau, a senior fellow at the American Enterprise Institute, a center-right think tank, said it would be an unfair policy. For instance, why should a restaurant’s tipped server have access to more tax breaks than the untipped chef working in the kitchen?
“It’s good news for the workers out in Nevada, where there are a lot of tipped workers,” said Pomerleau. “But you are isolating one segment of the population.”
Even tipped workers may find themselves ineligible for the tax break.
The proposed tax cut applies only to income taxes, not payroll taxes. That means the estimated 37% of tipped workers in the country who didn’t make enough money to face federal income taxes in 2022 would see no benefits from this proposal, per an estimate from the Yale Budget Lab.
“It is also going to do very little for workers, even that receive tips, at the low- to middle-part of the income distribution,” Rosenberg said.
The Tax Policy Center last year found ending taxes on tips would benefit about 2% of all households, or 60% of households with tipped workers, with an average tax cut of about $1,800 per year. Rosenberg said the analysis has not been updated since the tax plan was unveiled on May 12, but he expects figures to be similar.
Another 2024 analysis from the Yale Budget Lab had similar results, finding an estimated 4 million tipped workers – 2.5% of the total working population – would benefit from no taxes on tips. The average tax cut for families who benefit would be roughly $1,700, while the bottom fifth of earners would save $200.
How much will it cost to implement no taxes on tips?
Overall, the tip provision is estimated to cost about $40 billion over four years, according to the Joint Committee on Taxation. It’s a small fraction of the tax bill, which is estimated to add roughly $4 trillion to the deficit, but still a notable figure, according to Alex Muresianu, a senior policy analyst at the Tax Foundation, a center-right tax policy think tank.
“If you’re going to drive a hole in the tax base for no reason, you’d rather that hole be the size of VW Bug instead of a semitruck,” he told USA TODAY. “But at the end of the day, you’re still driving a hole in the tax base.”
Meanwhile, the GOP tax bill as a whole could cause low-income families to lose hundreds of dollars in after-tax income by cutting spending on programs like Medicaid and the Supplemental Nutrition Assistance Program, formerly known as food stamps, according to a new analysis from the Penn Wharton Budget Model.
While the top 0.1% of earners would gain $389,280 on average next year, Americans making between $17,000 and $51,000 stand to lose $705 on average, according to the analysis first reported by The New York Times. Those with an income of less than $17,000 would lose more than $1,000 on average, with losses worsening over time.
Americans could be squeezed further if the tax breaks have employers and workers lean more heavily on tips, exacerbating post-pandemic tipping fatigue.
While the latest proposal has guardrails that would limit the ability to restructure pay, “certainly in tip-eligible industries there would be a tax incentive to shift income toward tax-exempt tips instead of taxable wages,” Rosenberg said.
What happens next?
It’s not yet clear what the final tax bill will look like. Hardline Republicans who wanted deeper spending cuts to Medicaid and a full repeal of green energy tax cuts blocked the measure Friday, despite Trump asking Republicans to “UNITE behind” the legislation in a social media post.
The vote is likely a temporary setback, but it could delay plans for a vote by the full House, according to Reuters.