Nevertheless, 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. And in many cases, the tax cuts it would provide low- and moderate-wage tipped workers would be small or nonexistent. This 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), which
the Biden administration and
congressional Democrats such as Sen. Sherrod Brown (D-OH) have proposed making permanent. A single parent with one child making $19,000 in tips and $5,000 in wages, for example, would receive no tax cut from Sen. Cruz’s bill—as shown in Table 1. The restoration of the American Rescue Plan’s CTC expansion, on the other hand, would give them a full $1,090 tax cut.
At the same time, the No Tax on Tips Act 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. Given the difference in tax rates, the tax breaks from exempting part of these high earners’ income from income taxes would be far larger than any tax breaks for lower-income workers. For instance, a married couple making $1 million in wages could get a tax cut of $180,000 by shifting half of those wages to tax-free tips.
Sen. Cruz’s bill attempts to cover for the regressivity of the 2017 tax law but opens the door to even larger tax cuts for the wealthy.
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