Ending federal income taxes on tips, one of President Donald Trump‘s signature campaign pledges in the 2024 election, could potentially backfire as Americans grow weary of tipping, experts have told Newsweek.
No tax on tips was something the president said he would enact “first thing” if he won the November election. The idea, launched in the service industry behemoth that is Las Vegas, quickly took hold with the electorate, so much so that his Democratic opponent Kamala Harris was quick to pledge the same relief for tipped workers should she win the White House race.
Fast forward 5 months into the second Trump administration, the pledge hasn’t yet been enacted, but the idea is certainly beginning to take shape. As part of the One Big Beautiful Bill Act, Republicans have proposed a new tax deduction on tipped income up to $160,000 while keeping payroll taxes that are used to pay for Social Security and Medicare. Other legislative efforts have also been made. Texas Senator Ted Cruz, along with a bipartisan group of co-sponsors, introduced the No Tax on Tips Act to Congress in January, which would establish a new tax deduction of up to $25,000 for tips, subject to certain restrictions.
“Whether it passes free-standing or as part of the bigger bill, one way or another, ‘No Tax on Tips’ is going to become law and give real relief to hardworking Americans,” Cruz said on the Senate floor. The bill passed the chamber in May with support from both parties.
Lawmakers are clearly keen on the idea, and the proposal is certainly popular with the American public, too. Polling conducted exclusively for Newsweek by Redfield & Wilton Strategies back in July 2024 showed that 67 percent of Americans do not believe tips given to service workers should be taxed.
But the proposal, if enacted, could have some unintended consequences, business experts have told Newsweek.
Tipping Culture Fatigue
Javier Palomarez, founder and CEO of the United States Hispanic Business Council, told Newsweek the policy could “reinforce tipping in the short term but erode it over time,” pointing to a growing phenomenon of tipping fatigue—a weariness among consumers increasingly asked to tip in situations where it wasn’t previously expected.
A BankRate survey conducted between April and May this year found that 41 percent of Americans believe tipping is “out of control” and that businesses should better compensate their employees instead of relying on gratuities to provide a wage. Thirty-eight percent reported being annoyed with pre-entered tip screens, which are usually used in automated checkouts, particularly in cafes or fast food restaurants.
Still, the generosity of many Americans could pull through, at least for a short while. “By framing tips as a tax-free bonus, the policy may temporarily boost the perceived generosity and importance of tipping, encouraging consumers to view it as a more impactful way to support service workers,” Palomarez said.
But it’s unlikely to be straightforward. “Cultural norms around tipping are sticky,” he said. “By signaling that tipped workers deserve special tax treatment, the policy may further divide and complicate service industry compensation norms—bolstering tips in some sectors like restaurants while emphasizing reform calls in others like delivery services or app-based platforms. Over time, this could lead to service charges or higher base pay as consumers question tipping.”
Speaking to Newsweek, Mark Luscombe, principal analyst for Wolters Kluwer’s Tax and Accounting Division North America, warned that “the perception that tipped employees have a tax advantage may discourage tipping or at least the same amount of tipping by customers who are fully taxed on their incomes.”
Pay Boost for Workers
While tipping fatigue is certainly on the rise, the pay boost for workers in the service industry is tangible. The Urban-Brookings Tax Policy Center has estimated that middle-income households could pocket an extra $1,800 per year under the plan.
Joseph Camberato, CEO at NationalBusinessCapital.com, emphasized that the policy is not necessarily designed to address tipping culture—for all its pros and cons—at large.
“We’ve all seen those ‘tip’ prompts at self-checkout machines for things you grabbed off a shelf yourself,” Camberato told Newsweek. “This policy doesn’t fix that, and honestly, it’s not meant to. It’s for the 1.8 million restaurant servers who rely on tips to pay their bills. For them, not getting taxed on that income is a big deal. This policy targets the right group and gives them a meaningful raise, basically overnight.”
He added, “If anything, it’s going to help the people who deserve tips the most like servers, bartenders, hospitality workers, walk away with more money. Remember, they usually get taxed 15 to 20 percent on tips. Take that off the table, and it’s like giving them a 15 to 20 percent raise.
“If you’re already a tipper, you’re not suddenly going to stop because of this bill. But the person on the other side of the transaction is going to be walking away with more money, and that’s the point.”
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