Harris Core Project 2025 Winners: Addressing Bipartisan Economic Concerns through Alternatives to S.129 “No Tax On Tips”

Last Updated on November 24, 2025 by Chicago Policy Review Staff

TO: Senate Finance Committee Chairman Sen. Mark Crapo (R-Idaho) and Ranking Member Sen. Ron Wyden (D-Oregon)
FROM: Sabrina Beaver, Nilesh Kavthekar, Barbara Leppala, and Matthew Ryan, Ph.D., The University of Chicago Harris School of Public Policy
SUBJECT: Addressing Bipartisan Economic Concerns through Alternatives to S.129 “No Tax On Tips”

Executive Summary
S.129 “No Tax On Tips” eliminates the income tax on tipped income and has been proposed by both parties as a way to increase take-home earnings for lower-income workers. Upon closer inspection, we find that this proposal will provide little economic benefit to tipped workers. Instead, it costs a lot, complicates the tax code, and may create perverse incentives for businesses and consumers that erode its effectiveness. This issue is of particular interest to the Senate Finance Committee. By blocking this legislation at the Committee level, you can draw focus to more cost-effective solutions that can uplift everyday Americans, such as decreasing marginal tax rates for lower-income earners.

Background and Methodology
Before analyzing the merits of the “No Tax on Tips” bill, we want to provide context for who tipped workers are in the United States. The Budget Lab at Yale has conducted nonpartisan, in-depth analyses using multiple surveys. Approximately 4 million Americans receive tips, comprising less than 3% of all workers (Yale Budget Lab 2024b). Tipped workers tend to make only half as much as non-tipped workers—less than $30,000 annually. For tipped workers, only about a fifth of their total income comes from tips (Yale Budget Lab 2024a; Square 2024). Traditionally “red” and “blue” states show similar levels of tipped wages. They also tend to be unmarried and about 10 years younger (Yale Budget Lab 2024a). The top occupations are generally ones we might expect—waiters, bartenders, and, increasingly, couriers (e.g., food and grocery delivery gig workers)—with over 50% of tips going to the restaurant sector.

Both major presidential candidates campaigned on abolishing taxes on tipped wages in the 2024 election cycle. President Donald Trump appealed to the libertarian ideal of self-ownership in his proposal, arguing that workers should be entitled to retain more of the hard-earned rewards of their labor. In contrast, Vice President Kamala Harris invoked more egalitarian norms by using the policy as a push for income equality. Both discussed the proposal as a way to raise wages for the lowest-income workers in America.

Senator Cruz introduced S. 129 the No Tax on Tips Act in the 119th Congress on Jan 16, 2025, and Rep. Buchanan introduced identical language in the House as H.R. 482 the same day. This bill creates a tax deduction for “qualified tips” capped at $25,000 per year and calls on the Treasury to publish a list of occupations “which traditionally and customarily received tips” within 90 days of enactment. Here, we will examine the impacts of S.129 on the lowest-income workers in America, focusing on the economic impacts, feasibility, and cost-effectiveness.

Key Findings
While S. 129 makes good on President Trump’s campaign promise, there are serious concerns about its cost-effectiveness for increasing the wages of poor working Americans while other more effective alternatives exist.

Fiscal Impact
Removing income tax on tipped wages will cost approximately $100 billion over the next decade yet provides relief to only a small sliver of low-income workers.

The primary cost of this proposal is lost tax revenue (Yale Budget Lab 2024a).
Only about 5% of workers in the bottom 25% of the income distribution (i.e., < $17.66/hour or <$36,700/year) are paid with tips, meaning that the overwhelming majority of the lowest-income workers will not be helped by this proposal (Yale Budget Lab 2024b).
37% of workers who are paid tipped wages are already exempt from federal income tax: the
lowest-income workers will receive no benefit from this proposal (Yale Budget Lab 2024a).
This proposal arbitrarily privileges tipped low-income workers over others, despite facing similar financial difficulties.
Individuals in the lowest 20% of income benefit the least from this proposal, even less than the top 20% (who make over $211,000 per year). This pattern is consistent even if tax cuts under the Tax Cuts and Jobs Act (TCJA) are not renewed (Figure 1).

Direct Impacts on Wages and Employment
Abolishing income tax on tips will not meaningfully increase the number of jobs for tipped workers but will modestly increase pay for eligible tipped workers.

According to classic economic models, removing a tax on tips will ultimately:
- Increase the total number of job opportunities available to service workers;
- Reduce wages paid by employers; and ○ Increase after-tax earnings (i.e. take-home pay) received by workers.
Research shows that the number of jobs and number of workers in this market are relatively unaffected by changes in wages (Lichter et al 2014; Wiltshire et al 2023). Therefore, the increase in employment that results from this policy would be relatively small.
Workers tend to shift into sectors where wages are increasing, so other low-wage workers may move into tipped sectors, increasing costs of the bill (Breza and Kaur 2016; Brill, Pomerleau, and Veuger 2024).
Larger take-home pay from the tax exemption may incentivize employers to pay employees less, or be more hesitant to increase wages, negating the benefits for tipped workers (Ferman and Williams 2024).
The list of relevant professions provided by the Treasury will help safeguard against fraudulent reclassification by businesses into exempted categories. This helps contain the costs of the bill.

Indirect Impacts on Prices and Tips
Consumer prices for tipped services should decrease slightly, but consumer tipping behavior is harder to predict.

Eliminating taxes on tips reduces the cost of tipped labor faced by businesses, allowing them to reduce prices and thereby increase sales.
Sales will increase among tipped industries but only by a small amount. This is because businesses in tipped industries tend to have a strong preference between similar products (e.g., coffee from Starbucks versus Dunkin’), which mutes the benefit of decreased costs.
Consumer tipping behavior may change in various ways. There is no clear economic consensus on this issue:
- Consumers tip less: They believe that workers’ take-home pay has actually gone up as a result of the policy change, so consumers want to reap some of the benefits. This would lead to:
  - Lower tip incentives for workers, leading to reduced employment
  - Would decrease the overall price that customers pay even further
- Consumers tip more: Alternatively, the increased attention to the financial difficulties that tipped workers face may incentivize consumers to tip more. Consumers may also have a higher willingness to tip given the lower prices they now face. This would lead to:
  - Stronger tip incentives for workers, leading to higher employment
  - Partial elimination of the price reduction that customers received as a result of the policy change

Feasibility of S. 129: Politics and Implementation
The proposal is politically feasible but may face implementation challenges.

Exempting tips from tax has support on both sides of the aisle, as evidenced by campaign proposals from both Trump and Harris. There may be several reasons for the policy’s popularity despite its potential lack of efficacy.

Firstly, supporters of the policy are significantly more organized in achieving their policy interests than opponents:

Those that support the policy, such as the Culinary Union (Garret 2024), large businesses like Uber and Doordash (Rubin 2025), and service workers are much more united, making them more powerful than relatively disorganized untipped low- and middle-income workers in the United States. Exempting taxes on tips is also being proposed at a time of congressional inaction and a relatively easy win for politicians to share with their constituents.

IRS implementation will be hindered by a lack of resources and staff, especially with recent job cuts.

The exemption of tipped income on taxes further complicates the tax code, inviting evasion and other tax compliance issues (Michel 2024), which was recently acknowledged in a publication by the IRS itself (IRS 2020).
This proposed change would also take place in the context of a chronically under-staffed and under-resourced IRS, even before considering recent personnel cuts under the Trump administration (Looney 2024).

Recommendation
We oppose S. 129 “No Taxes on Tips”. Such legislation has broad bipartisan support and the potential to modestly help some tipped workers. However, it will cause unknown behavioral impacts, complicate the tax code, and arbitrarily help some tipped workers instead of the lowest-earning workers, regardless of whether they get tips. While some service workers would certainly stand to benefit, we have a responsibility to support the most cost-effective policies: S. 129 is not one of them.

Given these issues, policymakers should seek alternatives to better accomplish the economic goals of removing the taxes on tips. We investigated several such proposals, including raising the federal minimum wage, eliminating the sub-minimum wage for tipped workers, increasing refundable tax credits, and lowering the marginal tax rate for the lowest-paid workers. Of these options, we recommend lowering the marginal tax rate for the two lowest tax brackets, including workers with up to $47,150 of taxable income, which approximates the federal poverty level for a family of four (IRS 2025; American Council on Aging 2025).

The most significant challenge of this proposal is the cost. By drastically reducing the tax rate for the lowest two brackets, the government will bring in significantly less revenue, though the exact amount will vary based on the exact tax rate. We propose offsetting this cost by raising the marginal tax rate for the highest tax brackets. By doing so, total tax revenue will be unchanged, rendering the total cost of the program even cheaper than adopting “No Tax on Tips” Legislation, while ensuring prosperity for America’s working class.

Conclusion
Lowering taxes by income, not occupation, could gain bipartisan support from Republicans and Democrats hoping to help hard-working Americans. It would increase take-home pay for most tipped workers—and for lower-income workers across the board. Reducing the marginal tax rate for the two lowest brackets can circumvent many challenges that the original proposal poses. We expect less economic uncertainty, a simpler tax code, and a more targeted approach will lift take-home wages. In sum, this will more effectively help low-income workers, whether tipped or not. We ask you to oppose S.129 in favor of our proposed alternative

References
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Brill, Alex, Kyle Pomerleau, and Stan Veuger. “A Tip Exemption Is Not Sound Tax Policy.” American Enterprise Institute. August 16, 2024. https://www.aei.org/economics/a-tip-exemption-is-not-sound-tax-policy/.

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Rubin, Richard. “Uber, DoorDash Want ‘No Tax on Tips’ Expanded to Include Independent Drivers, Food-Delivery Workers.” The Wall Street Journal. February 21, 2025. https://www.wsj.com/politics/policy/trump-no-tax-tips-uber-doordash-drivers-independent-contractors-b5ee5412.

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The Budget Lab. 2024b. “No Tax on Tips Act: Background on Tipped Workers.” June 24, 2024. https://budgetlab.yale.edu/news/240624/no-tax-tips-act-background-tipped-workers.

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