Did Democrats Just Hand Trump A Win On Taxes?
Senate Says Yes to Tax-Free Tips. Will The House Do The Same?
Did the Senate Democrats just outfox themselves? Or did the Senate Republicans?
That is the question lingering over Tuesday’s unanimous approval within the Senate of a bill largely eliminating taxes on cash tips.
Sen. Jacky Rosen (D-Nev.) brought the No Tax on Tips Act to the floor with the expectation that it would be blocked, but Sen. Ted Cruz (R-Texas), the sponsor of the bill, declined to do so. The bill passed via unanimous consent, a move typically reserved for routine legislative matters.
Senator Rosen presumably anticipated setting the Republicans up for a bit of negative spin highlighting whatever legislative maneuver they might have deployed to block the bill, only to find no opposition to the bill at all.
Senator Ted Cruz, the bill’s sponsor, continues to be unequivocal in his support for the legislation.
“President Trump made a promise to the American people that he would eliminate taxes on tips. In Congress, I formed a bipartisan, bicameral coalition to get that done, and in the Senate introduced the No Tax on Tips Act. Today, I went with Senator Rosen to the floor to secure Senate passage of the bill. This legislation will have a lasting impact on millions of Americans by protecting the hard-earned dollars of blue-collar workers, the very people who are living paycheck-to-paycheck. I urge my colleagues in the House to pass this important bill and send it to the President’s desk to be signed into law.”
No taxes on tip income is an explicit part of Agenda 47. Passage of this bill is without a doubt another tick mark in President Trump’s “Promises Kept” column.
Even as Chuck Schumer strives to cast this bill as a matter of Democrats supporting working class tax relief, he is still on record as saying the Republican-sponsored legislation is a good idea.
"Working Americans—from servers, to bartenders, delivery drivers, and everything in between—work hard for every dollar they earn and are the ones who deserve tax relief, not the ultra-rich. While President Trump and Republicans push tax breaks for billionaires and stick the middle class with the bill, Senate Democrats are standing strong to protect America's working families."
A similar bill sits largely ignored in the House of Representatives, while Congress wrangles over President Trump’s “One Big Beautiful Bill.”
Arguably, the passage of the Senate version adds impetus for the tax exclusion on tip income to be a part of the final budget reconciliation of the “One Big Beautiful Bill”.
What remains to be seen is whether this complicates ultimate passage of President Trump’s signature tax and budget legislation.
The significance of this legislation appears to be somewhat problematic. According to Yale University’s Budget Lab, tipped workers comprise 2.5% of the total US workforce.
It is not clear at this time whether tips provided by readers of All Facts Matter would qualify for tax exclusion.
Two aspects of tipped income which may be incorrectly assessed are that tipped workers tend to be younger workers, and as much as a third of tipped workers already pay no income tax.
However, relieving the tax burden of younger workers expands their ability to establish themselves on a sounder economic footing. Expanding the proportion of tipped workers exempt from income tax could make such work a useful adjunct to pursuing educational opportunities without incurring extraordinary student debt, for example.
Also, if tip income is excluded from income tax calculations, that would also expand the number of individuals who qualify for the Earned Income Credit—a fully refundable credit where individuals who otherwise owe no tax still get a cash payment from the government.
Regardless of economic impact, the political impact of this is a clear win for Donald Trump.
It falls to the House of Representatives to determine if this is a win for Congressional Republicans as well.
I feel like this is mostly for show and morale. And for some people whose income from tips is substantial, not including tips in income could actually make their income too low for some tax benefits, that is unless they provide a work around to include it for calculation of those credits. For example, the refundable part of the Child Tax Credit requires income above $2500 and is only 15% of the income amount over $2500. For some low income workers, those tips help raise their income enough to qualify for tax credits. Just some thoughts from a tax professional.
Good news. Peter, have you seen any forecasts on how the House will vote?
Also, we don’t know how this will affect revenue for the government. They may have accurate info on the percentage of employees who receive tips, but not on how much of those tips are reported as income. For example, even if I pay a bill with a credit card, I almost always tip in cash. This is because some employees don’t receive their tip income from their employer until the end of the month, or whenever the employer gets the credit card income, and I want the people I tip to receive their benefit of my tips right away. It then is entirely up to them if they are “honest” in reporting this income, so the government can steal it.
So, Peter, I would find it interesting if you’ve got any estimates. If the no-tax-on-tips bill passes, and doesn’t reduce government revenue by much, politicians may decide the political benefit of more tax exclusions is worth it!