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Democrats push their own version of no tax on tips
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President Donald Trump successfully got a no tax on tips policy through Congress in July, but Democrats are serving up their own version.
Trump campaigned on the idea of not taxing tipped wages, a policy that was included in the large budget and tax bill Congress passed in July.
Democrats, including New Mexico’s Rep. Gabe Vasquez, are pushing their own version of no federal tax on tips with a bill that would also eliminate the separate tipped minimum wage, creating one federal minimum wage.
Economic experts are skeptical of offering tax breaks that incentivize paying people with tips instead of basing tax breaks on income level.
“In general, lowering taxes for lower income people, middle class and below, is a good idea,” said Matías Fontenla, a professor of economics at the University of New Mexico. “I just don’t understand why they would do just on tips and not for the general population.”
About 2% of U.S. workers were in tipped jobs in 2023, according to a study from The Budget Lab at Yale University. More than a third of tipped workers already had low enough income that they had no federal income tax in 2022.
Taxes can serve as an incentive for employer or consumer behavior. Eliminating tax on tips could encourage employers in tip-based industries to lower salaries, with the justification that employees are benefiting from a tip tax break, according to Fontenla.
“This creates an unnecessary, weird incentive that could potentially be nonoptimal, especially if they don’t change the minimum wage,” Fontenla said. He is in favor of one standard minimum wage.
Both Trump’s policy and the policy proposed in the Democrat-led TIPS Act offer tax relief in the form of a deduction, meaning federal taxes would still be withheld from employees’ paychecks.
Trump’s no tax on tips policy expires in 2028 and offers a deduction for up to $25,000 in tipped income. The deduction phases out for people making over $150,000. The IRS plans to publish a list of occupations eligible for the tax deduction in October.
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On Monday, Vasquez donned an apron at the Barelas Coffee House, taking orders for coffee and burritos smothered in green chile under the guidance of one of the restaurant’s servers. His hour as a waiter was meant to promote the TIPS Act.
The bill would go further than Trump’s policy by not including a cap on the deductible and eliminating the separate tipped minimum wage. The federal tipped minimum wage is $2.13, while regular federal minimum wage is $7.25 an hour. New Mexico’s tipped minimum wage is $3 an hour, while regular minimum wage in the state is $12 an hour. The legislation would also make no tax on tips permanent.
“If we truly believe in service industry workers that help support our communities and our businesses, it should be permanent,” Vasquez said.
The deduction would phase out for people earning over $112,500 annually.
One of the challenges of living on a tipped wage is fluctuating pay, said Alexis Campos, the server showing Vasquez the ropes.
“It’s just really random pay. So it’s kind of hard to figure out how much you’re going to make for the month for the bills,” Campos said. “It could be $800, or you can make $1,000 or $400, so it really fluctuates.”
