Washington, D.C. — Last month, Sen. Ted Cruz (R-TX) and Rep. Byron Donalds (R-FL) introduced legislation dubbed the “No Tax on Tips Act,” which would exempt tips workers receive from income taxes. However, new analysis from the Center for American Progress finds that this legislation is more of the 2017 tax law’s empty promises for workers, opening the door to tax abuse by the wealthy.
The No Tax on Tips Act is deeply flawed; it would leave out the more than 95 percent of low- and moderate-wage workers who are not in tipped occupations. On top of this, it contains few, if any, guardrails to prevent high-income professionals such as hedge fund managers from shifting their compensation to a tax-free tipping model.
This new analysis reveals how this proposal is a much worse approach to lifting working families than the American Rescue Plan’s enhancements to the earned income tax credit (EITC) and child tax credit (CTC). Some key takeaways from a side-by-side comparison are listed below:
- Take a single parent with one child who earns $24,000 annually—$5,000 from wages and $19,000 from tips. Their initial $210 tax cut would be completely wiped away by the reduction in their child tax credit from $1,910 to $1,700 because of the limit on the CTC’s refundability. This parent would receive no tax cut from the No Tax on Tips Act. The restoration of the American Rescue Plan’s CTC, on the other hand, would give them a full $1,090 tax cut.
- Take a 20-year-old student who works two days a week as a waiter, earning $14 an hour and $12,000 a year. They would receive no tax cut from the No Tax on Tips Act regardless of how much they receive in tips. The restoration of the American Rescue Plan’s EITC, on the other hand, would give them a full $1,700 tax cut.
- Take a married couple with a 7-year-old and a 2-year-old. One of them works, earning $40,000 annually—$20,000 in wages and $20,000 in tips—while the other stays home to take care of the kids. This couple would receive a $480 tax cut from the No Tax on Tips Act, which is smaller than the $2,600 tax cut they would receive from restoring the American Rescue Plan’s CTC.
“The No Tax on Tips Act potentially kicks the door wide open for tax abuse by the wealthy and fails to deliver any meaningful tax cuts for low- and moderate-wage workers,” said Brendan Duke, senior director for economic policy at CAP and author of the column. “Just 5 percent of all workers making less than $25 per hour receive tips. And even among those that do receive tips, the tax cuts would be minimal at best. Restoring the American Rescue Plan’s EITC and CTC expansions would have more widespread benefits for low- and moderate-wage workers, lifting both tipped workers such as waiters and nontipped workers such as home health aides.”
Read the column: “Sen. Ted Cruz’s No Tax on Tips Act Does Little for Low- and Moderate-Wage Workers But Opens Door to Tax Abuse by Wealth” by Brendan Duke
For more information or to speak with an expert, please contact Sarah Nadeau at [email protected].