Proposed Tax Changes on Tips Encounter Mixed Reactions

President Donald Trump’s significant tax and spending initiatives are receiving pushback from both Democrats and more conservative members of his own party. However, one proposal that has garnered unexpected bipartisan agreement is the elimination of taxes on tips.

This past Tuesday, the Senate passed a bill in line with a previous House bill, fulfilling campaign promises made by Trump and echoing ideas from his Democratic challenger, former Vice President Kamala Harris.

The House plan allows workers to deduct all reported tips from their taxable income. In contrast, the Senate plan imposes limits—$18,500 for individuals and $25,000 for joint filers—while gradually lifting these caps for higher earners. This tax deduction is set to expire at the end of 2028.

If this legislation is approved, it would enable filers to deduct some or all of these tips starting from 2026.

Economists estimate that removing taxes on tips could add roughly $100 billion to the federal deficit over the coming decade.

Many restaurant employees continue to earn the minimal federal wage of just $2.13 per hour, a figure that rises slightly to $3.55 in states like New York. The assumption is that tips would help workers reach a federal minimum wage of $7.25 to bridge the income gap.

A survey, referenced by the White House and conducted by financial technology firms, found that 83% of restaurant workers support a tax-free tipping policy. The National Restaurant Association has also endorsed Trump’s plan.

“Implementing tax-free tips acknowledges the value of a committed workforce without tax implications on overtime. While over 2 million servers and bartenders stand to gain, the benefits would also recognize the dedication of 13 million hourly employees within the sector,” said a spokesperson from the association.

While the bill suggests it would put more money in the hands of servers and bartenders, it has faced criticism from advocacy groups focused on workers’ rights and even from some workers themselves. There’s a cautionary sentiment surrounding quick acceptance of the proposal due to potential cuts to programs like Medicaid and SNAP, which many in the restaurant industry heavily depend on.

“This is honestly one of my biggest worries right now. I rely on SNAP. I depend on Medicaid. At one point, I didn’t have health insurance while drawing a minimum wage,” expressed a concerned worker.

According to one advocacy group, the elimination of taxes on tips may not benefit the majority of restaurant workers since about two-thirds of these employees don’t earn enough to owe federal income taxes.

To illustrate, a worker earning $2.13 per hour and working 40 hours a week for 52 weeks would make only $4,430.40 a year. Employers are mandated to make up the difference if tips fail to elevate a worker’s wage to at least $7.25 an hour, potentially raising earnings to $15,078 annually. Federal income taxes kick in for those earning above $14,600—a threshold many still fall short of due to fluctuating schedules and inconsistent tips.

Challenges of Work Requirements

Workers in the restaurant sector are predominantly reliant on services such as SNAP and Medicaid, but new work requirements may complicate their access to these programs.

For instance, the proposed bill includes job mandates for Medicaid that require able-bodied adults aged 19-64 to work a minimum of 80 hours a month to maintain eligibility.

For many in the restaurant industry, meeting these expectations is simply impractical, not because of a lack of willingness, but due to unpredictable consumer demand.

A study from Harvard Kennedy School’s Shift Project highlighted that one in five service sector workers reported insufficient time, with a variance in hours worked leading to instability in their schedules.

“I’m really struggling right now because I only get shifts 4-5 days a week. Some weeks I barely get any hours,” said a worker named Oledenana.

“When I ask about getting more hours, the manager might say yes, but then they just don’t schedule me at all. Last week, I wasn’t assigned any shifts,” Oledenana added.

As the demand for dining out has declined, many Americans are tightening their budgets, partly due to concerns over the economy and the implications of Trump’s tariffs.

Data from the Consumer Price Index indicated that spending on dining out remained stagnant from February to April and began to drop as the year progressed.

KPMG’s Consumer Pulse report forecasts a 7% decline in consumer spending this year.

This downturn could adversely affect approximately 45% of restaurant workers currently relying on Medicaid, as demand for their shifts may further diminish due to an economic slowdown.

“More restaurant workers could lose Medicaid than benefit from minor tax changes. This isn’t the right approach,” stated Saru Jayaraman, founder of the advocacy group One Fair Wages.

“These workers rely on Medicaid because their wages are so low, making self-sufficiency nearly impossible.”

Similar concerns are raised regarding SNAP benefits. According to the Center on Budget and Policy Priorities, the proposed tax legislation could result in around 11 million people, including restaurant workers, losing crucial benefits. The House bill is expected to cut $300 million from SNAP over the next decade, while the Senate proposes a cut of $211 billion.

“These reductions are unnecessary. There’s no need to cut benefits to eligible individuals to save money,” said a representative from the think tank.

Nationwide, around 18% of restaurant workers depend on SNAP, including Oledenana.

“How can we survive? How do we afford basic necessities? I might lose my benefits! What’s happening to our country?” Oledenana mused rhetorically.