Last month, Sen. Ted Cruz (R-TX) and Rep. Byron Donalds (R-FL) introduced the "No Tax on Tips Act," aiming to exempt tips from income taxes. However, a new analysis by the Center for American Progress (CAP) indicates that this legislation may benefit wealthy individuals more than low- and moderate-wage workers.
The CAP analysis highlights that the No Tax on Tips Act would exclude over 95 percent of low- and moderate-wage workers who do not work in tipped occupations. Additionally, the act lacks sufficient safeguards to prevent high-income professionals from exploiting a tax-free tipping model.
Comparisons between this proposal and enhancements under the American Rescue Plan reveal significant disparities in benefits for working families:
- A single parent earning $24,000 annually, with $19,000 from tips, would see their initial $210 tax cut nullified due to a reduction in their child tax credit (CTC). Restoring the American Rescue Plan's CTC would result in a $1,090 tax cut.
- A 20-year-old student working part-time as a waiter and earning $12,000 annually would receive no tax cut from the No Tax on Tips Act but would benefit from a $1,700 tax cut under the restored EITC.
- A married couple with children where one partner earns $40,000 annually through wages and tips would get a $480 tax cut from the No Tax on Tips Act. In contrast, restoring the American Rescue Plan’s CTC would provide them with a $2,600 tax cut.
"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. "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."
Duke argues that restoring enhancements to the EITC and CTC under the American Rescue Plan would offer broader benefits for both tipped and nontipped workers.
For further information or to speak with an expert, contact Sarah Nadeau at [email protected].