Sen. Ted Cruz (R-TX) introduced legislation to exempt tips from being subject to taxation under the federal income tax, the No Tax on Tips Act. More specifically, The bill exempts “cash tips” – cash, credit and debit card charges, and checks – from federal income tax by allowing taxpayers to claim a 100% above-the-line deduction at filing for tipped wages. 

Upon introduction, Sen. Ted Cruz (R-TX) said, “American workers in dozens of industries depend on tipped wages to support themselves. Today, I am introducing pro-worker legislation, the No Tax on Tips Act, to ensure they get to keep all of those tips. This legislation is a common-sense pro-worker bill that will help families deal with the historic inflation caused by the Biden administration.”

Sen. Cramer (R-ND) said, “President Trump is right: tips are earned by providing good service. It is simpler and more fair to let these workers keep the reward they earned rather than send it to D.C. bureaucrats. I am pleased to join Senator Cruz as a co-sponsor of the No Tax on Tips Act.”

Sen. Rick Scott (R-FL) said, “Under Biden’s administration, families are struggling to make ends meet with 20% inflation and policies that make their lives harder. We need to take action now to lower costs for hardworking Americans and get our economy back on track. During my time as Governor of Florida, we cut taxes over 100 times to help businesses thrive and families keep more of their hard earned dollars. It’s time we do that on the federal level with our No Tax on Tips Act.”

Opponents point out that with a skyrocketing deficit, this is not the time for tax breaks. The tax cut is projected to increase the deficit by $250 billion or more over a decade. They argue this is nothing but a ploy to buy votes that taxpayers will have to pay for. In addition, bill sponsors want to extend the 2017 Trump tax cuts which the Congressional Budget Office has estimated that just extending the portion of Trump’s tax cuts that expire at the end of 2025 would cost $4.6 trillion over a decade. 

Exempting tips from taxation creates a disparity where tipped workers receive a tax benefit not available to non-tipped workers. This could be seen as unfair to workers who also rely on variable income but are not in tipping professions.  In addition,  exempting tips could incentivize underreporting of income or misclassifying wages as tips to evade taxes. This would undermine the integrity of the tax system and increase the burden on tax enforcement agencies.

The No Tax on Tips Act brings up significant criticisms related to fiscal impact, equity, administrative challenges, and potential unintended consequences on wages and employment.

Should Congress pass legislation to eliminate the application of the income tax on cash tips through a deduction allowed to all individual taxpayers?