Senator Ted Cruz, R-T.X., recently introduced the “No Tax on Tips Act” in the Senate, a bill co-sponsored by Senators Daines (R-M.T.), Cramer (R-N.D.) and Scott (R-S.C.). The bill proposes an amendment to the Internal Revenue Code to exempt cash tips from income tax through a deduction available to all taxpayers. The act aims to alleviate the tax burden on workers that rely heavily on tips, with the goal of increasing disposable income and potentially improving financial stability.
If passed, the Act would create a new Section 224 of the Internal Revenue Code, allowing taxpayers to deduct the amount of cash tips received from their income. This deduction would apply to both itemizers and non-itemizers, bypassing limitations that apply to other deductions. The new Section 224 would apply to taxable years beginning after December 31, 2024.
Implications of the Act include relief for service industry workers, as cash tips make up a significant portion of income for many in the hospitality and service sectors. By allowing these workers to deduct their cash tips entirely, the Act could increase their disposable income and ease the administrative burden of reporting tips and paying taxes on them, potentially reducing penalties for underreporting.
Despite the positive effects for tip-reliant workers, concerns have been raised about the potential impact on federal tax revenue. Exempting a large portion of income from taxation could lead to a significant reduction in revenue, necessitating adjustments such as increased taxes or reduced public spending. In addition, exempting tips from taxation while not addressing the standing of other low-income workers who do not receive tips raises questions about equity and fairness.
The Act also presents potential avenues for abuse, as accurate reporting of tips compared to wages remains a challenge. Employers might be incentivized to shift wages in order to take advantage of favorable tax treatment for tips. The economic justification for exempting tips from taxation is debatable, as tips are considered compensation for services rendered, similar to wages. Exempting tips while taxing wages could set a precedent for other types of income seeking similar treatment.
The Act’s viability remains uncertain, with questions remaining about whether it is a genuine policy initiative or a public relations effort. The merit of the policy will need to be assessed as it moves through the legislative process, with potential implications for tax revenue, administrative burdens for workers, and equity among different types of earners. Ultimately, the impact of the “No Tax on Tips Act” on the economy and workers’ financial well-being will need to be carefully considered before moving forward.
