Trump’s Tax-Free Tips Proposal May Sound Good But Is a Risky Bet

Feb. 4, 2025, 9:30 AM UTC

President Donald Trump’s pledge to eliminate taxes on tips has been framed as a boon for hospitality workers, but it risks deepening inequities among low-wage earners while destabilizing compensation structures in the service industry.

While some workers might see benefits in the near term, the proposal overlooks its potential to widen disparities between tipped and non-tipped workers, tilt the hospitality sector toward precarious tip-based employment, and shift wage responsibilities further onto customers.

The proposal underscores how deeply embedded tipping is in the economy and reveals the need for careful, thoughtful policymaking to address an important sector’s inherent vulnerabilities. Addressing wage inequities requires moving beyond ad-hoc solutions and focusing on more systemic reforms.

Instead of targeting tips, politicians and advocates for individuals in service industries should focus on raising the federal minimum wage and eliminating the tipped minimum wage exemption. These solutions would address income disparities more effectively and provide financial stability across industries without relying on the unpredictability of gratuities.

By favoring tipped workers, Trump’s proposal leaves out millions of non-tipped workers in low-paying sectors, such as retail or manufacturing, who may face similar financial struggles. Under a policy of tax-free tips, tipped workers could earn more in total income than their counterparts in other low-paying sectors and still pay less in taxes.

Such a policy would disproportionately benefit one group of workers while leaving others making the same or less in total income without any relief. This would increase regressivity in the tax code within the service industry.

The average tipped income in 2018, the last year for which complete data is available, was $6,000. If tips are tax-free, a worker in a non-tipped position could make as much as $6,000 less than their tipped counterpart but have the same taxable income. The policy would exacerbate existing inequities within the working class—favoring tipped workers because of the industry they work in, not because their financial struggles are greater.

Even if the policy isn’t designed to prioritize tip-based employment, its effect could motivate more workers to remain in precarious, low-wage, high-tip jobs rather than pursue more stable, comparable-wage employment. The financial appeal of tax-exempt gratuities could outweigh the long-term advantages of stable hourly or salaried positions when service workers are trying to make ends meet.

Employers in the hospitality industry, already accustomed to relying on tips to supplement pay, could also see this as an opportunity to suppress or stagnate hourly wages—knowing that tips now carry additional tax-free value for employees.

A restaurant server earning most of their income from tips, for example, may be reluctant or financially unable to transition to a retail or warehouse job that offers a steadier paycheck, but one without any tax-free income. While rational in the short term, this decision would tie the worker to roles that are inherently unstable. It would also set the bar significantly higher for what a fully taxable position would need to pay to make it worth losing preferential tax treatment.

The federal tipped minimum wage has been stalled at $2.13 per hour since 1991. Adjusting for inflation, that figure should be nearly $5 today. This suppressed wage figure has already created a system in which workers depend on gratuities to make anything approaching a livable income. Rendering tips tax-free risks further entrenching this imbalance, making wages less reliable and workers more vulnerable during economic downturns, seasonal slumps, or changes in consumer behavior.

Evidence also suggests that discrimination in tipping may be more prevalent than commonly acknowledged. Instead of addressing systemic wage insecurity, exempting tips from taxation could deepen it by motivating businesses to rely on tips as a substitute for fair wages, forcing more employees into financial instability, and subjecting them to the unregulated tip economy where discriminatory practices go undetected and unredressed.

Instead of encouraging precarious employment, policymakers should strengthen job security and create opportunities for upward mobility, while restricting employers’ ability to take advantage of vulnerable low-wage employees. Piecemeal solutions that benefit some low-wage workers at the expense of others only stratify the working class and inject regressivity into the lower tax brackets.

The tipped minimum wage exemption should be eliminated in phases, raised over a period of years until it matches the federal minimum wage. This would give businesses time to adjust while ensuring tipped workers gain a path toward a livable income not dependent on gratuities. Aligning tipped wages with the federal minimum wage would help reduce income volatility for workers who may face seasonal income fluctuations and reduce employers’ ability to pay lower wages to tipped workers.

Ultimately, eliminating the tipped minimum wage exemption should be followed by an increase in the federal minimum wage to ensure all wage workers can earn a livable income. The current federal minimum, $7.25, was set in 2009—and adjusting for inflation should be just shy of $11 in 2025.

The federal minimum has clearly failed to keep pace. In doing so, it has reduced wage workers’ purchasing power and contributed to financial insecurity. Raising it to a more sustainable level while phasing out the tipped minimum wage exemption would help tipped workers once their wages are brought in line with the new minimum. It also would lift scores of other non-tipped workers out of poverty with them.

Exempting tips from taxation may be politically expedient and make for a good sound bite, but it doesn’t address the deeper wage inequities that keep millions of workers trapped in financial precarity. A truly equitable policy would prioritize stability, fairness, and opportunity for everyone in the workforce.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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To contact the editors responsible for this story: Melanie Cohen at mcohen@bloombergindustry.com; Daniel Xu at dxu@bloombergindustry.com

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