Several of President Donald Trump’s key campaign promises were written into the new Republican law which slashes federal benefits and implements tax breaks for primarily higher-income Americans. One of the more touted provisions, the elimination of federal income taxes on tips for certain workers, is intended as a fulfillment of a pledge that he adopted in part to win the swing state of Nevada—which has the highest proportion of workers in the service and hospitality industries of any state.
But Trump’s “Big Beautiful Bill,” may not deliver the goods. As it stands, the newly enacted law would benefit only a small percentage of American workers overall, and exclude the lowest-income tipped workers. Workers will be able to deduct up to $25,000 annually from their taxable income, although it begins phasing out for individuals earning $150,000 per year, or $300,000 for joint filers.
“Tipped workers loom larger in our imagination, because they’re often the interface that we have with the service sector. But behind them are just a vast majority of workers that are not tipped at all, and so regardless of how much they make, they’re not going to see any benefit from this,” said Ernie Tedeschi, the director of the Yale Budget Lab. Only around 4 million American workers are in tipped occupations, roughly 2 and a half percent of all employment. Moreover, of the lowest-earning workers in the country, only about 5 percent worked in tipped occupations, according to research by the Yale Budget Lab.
The provision is emblematic of one the law’s defining characteristics: An emphasis on providing relief for middle- and higher-income Americans, while low-income families bear the brunt of dramatic cuts to food stamps and Medicaid, and are unable to fully benefit from key tax provisions. The legislation modestly expanded the child tax credit and indexed it to inflation, but it is not fully refundable, and thus the lowest-income Americans will be unable to receive the whole credit. Similarly, provisions ending taxes on overtime pay and a reduction to standard tax deduction for seniors would provide limited benefits to the lowest-income Americans who do not have sufficient tax liability to claim the deductions.
“If your desire was to reach the very lowest income earners, then you would want to pursue something that’s structured more like a refundable tax credit or a payroll tax credit, versus an income tax deduction,” said Joseph Rosenberg, a senior fellow at the Urban Institute. Rosenberg continued that the new tax deduction on tips would largely benefit tipped workers that “fall more in the upper half of the income distribution rather than the bottom half.”
The idea is rooted in political considerations. Both Trump and his Democratic rival, former Vice President Kamala Harris, had expressed support for such a policy in an effort to win over swing voters in Nevada. Democratic lawmakers in Nevada have also embraced this policy; in 2024, Senators Jackie Rosen and Catherine Cortez Masto co-sponsored legislation to end federal taxes on tips. A bill by Nevada Democratic Representative Steven Horsford would eliminate taxes on tips, but also require restaurants to pay their tipped workers the current federal minimum wage for untipped workers, which is $7.25 an hour.
But Democratic politicians and labor groups that are otherwise supportive of eliminating taxes on tips opposed the new law. Ted Pappageorge, the secretary-treasurer of the Culinary Union in Las Vegas, expressed frustration that the tax deduction is not permanent—it is set to sunset in 2028—while other tax provisions that benefit higher-income Americans were made permanent.
“Massive corporations and the super wealthy came out the big winners, and workers are getting scraps,” Pappageorge argued.
He also noted that the law pushes the burden onto the Treasury Department to determine the specifics of implementation of the provision, which is applicable for the current fiscal year and set to go into effect during the next tax filing season.
“If you talk to the average tipped worker, the idea of getting some relief is welcome. But we’re not sure what that’s going to look like,” Pappageorge said.
Moreover, given the $25,000 cap, even middle-income tipped workers will still need to pay some taxes on their tips. The average tipped worker gets 40 percent of their wages from tips; if someone is making $35,000 in tips each year, they would still need to pay taxes on $10,000 of their tips.
Certain low-income service industry workers might also be affected by both cuts to benefits programs and being unable to access the deduction on tipped wages. The law dramatically cut funding for the Supplemental Nutrition Assistance Program, or SNAP, and Medicaid, potentially resulting in millions of people seeing reduced benefits—or losing them entirely.
“You may have a lot of low-income tipped workers that have read the news, and think they’re getting this big benefit from not paying taxes on their tips—and all of a sudden, not only are they not benefiting, they’re actually losing benefits on other things,” said Rosenberg.
There is also uncertainty about how this change will affect the behavior of tippers, particularly as Americans are growing fatigued with tipping in general. Customers may not tip as much if they believe that their server will not need to pay income taxes on their tips, without necessarily differentiating between the different incomes of a waiter at a cheaper restaurant and one who works at an expensive one.
“It’s an example of how workers at the bottom could get doubly impacted by this. A lot of them are not going to get the benefit from the deduction in the first place, and … they may be subject to a blowback from the backlash against tips generally,” said Tedeschi. “That’s not fair to them.”
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