A Republican-backed effort to change tax laws could benefit hundreds of thousands of Texans who depend on tip revenue as their main source of income.
Budget analysts, however, warn the move could bloat the already soaring federal deficit by hundreds of billions of dollars over the next decade. Meanwhile, some industry experts call the proposal an election-year ploy designed to lure younger voters to the GOP side.
U.S. Sen. Ted Cruz, R-Texas, filed the No Tax on Tips Act last week. The legislation would exempt tipped income when employees file year-end federal tax returns. The idea was first floated by former President Donald Trump at a campaign rally in Nevada earlier this month.
“This legislation is a common-sense pro-worker bill that will help families deal with the historic inflation caused by the Biden administration,” Cruz said in a press release when he filed the legislation, which is co-sponsored by three fellow Senate Republicans: Steve Daines of Montana, Rick Scott of Florida, and North Dakota Sen. Kevin Cramer.
The legislation is “an opportunity to support tipped employees who really make restaurants thrive and succeed,” said Kelsey Erickson Streufert, the chief public affairs officer for the Texas Restaurant Association.
Streufert said the TRA worked closely with Cruz’s office on the legislation and the new policy. If adopted, she said it wouldn’t change how tips are collected and reported, or what a tipped employee takes home at the end of a shift.
“Say you're paying 15% taxes to the federal government. Your tax rate would change to zero for those tip amounts. And so, for us, it was really important that all of those reporting pieces stay in place,” Streufert said.
That’s because most servers earn less than $2.50 per hour because their reported wages are compensated by tip income.
“It's really important that those tips be factored into an employee's income because of things like credit checks and whether you qualify for a mortgage or some other type of loan,” she said. “It's important that you have sort of that official documentation of an employee's total wages, including tips.”
The Texas Restaurant Association estimates there are about 1.3 million people employed in the $70 billion food service industry in Texas. The proposed legislation would also apply to non-food and bar service employees, including tipped employees in cosmetology and other industries.
What would the 'No Tax on Tips Act' cost the federal government?
Though the proposal is being hailed as a benefit by some, budget analysts warn about the long-term economic impacts due to lost revenue.
The fiscal impact of making tips tax deductible would lead to tens of billions in losses to federal coffers, according to the Committee for a Responsible Federal Budget, a non-partisan economic think tank whose staff includes former lawmakers and former leaders of the Congressional Budget Office, the Office of Management and Budget and the Government Accountability Office.
“We estimate exempting all tip income from federal income and payroll taxes would reduce federal revenues by $150 to $250 billion over ten years on a static basis and could reduce revenue significantly more once behavioral effects are incorporated,” the committee wrote in an analysis shortly after Trump announced the proposal.
Those behavioral effects are currently unknown, but the loss in revenue could be even higher if regular income is reclassified as tip income to earn a larger exemption.
“[That] could lead to a larger shift toward lower base pay and higher tipped income, more broadly,” the committee noted. “As an illustrative example, if tips were increased by 10 percent, the policy would reduce revenue by $165 to $275 billion, and if they doubled it would increase deficits by $300 to $500 billion.”
When asked about the committee’s report, Cruz’s office said the issue isn’t about revenue but instead about spending.
“Washington doesn’t have a revenue problem; it has a spending problem. [The Congressional Budget Office] recently projected outlays for FY 2024 are now $6.805 trillion, $363 billion higher than what was projected just four months ago,” said Macarena Martinez, a Texas-based spokesperson for the senator.
Martinez said part of that increase, about $145 billion, was due to President Biden’s attempts to eliminate student loan debts for some borrowers.
“Workers should be able to keep more of their hard-earned dollars and relief for tipped workers should be a point of discussion as Congress begins to consider [the 2017 Tax Cuts and Jobs Act] expirations,” Martinez added.
TRA’s Streufert also predicted the issue would likely be part of a broad conversation on taxes and the economy next year, regardless of who is in the White House.
“There are several current tax provisions that are expiring. And so, Congress is really gearing up to have a major look at the tax system as a whole next year,” she said.
While those conversations take place, Streufert said lawmakers should be mindful of the economic contributions service industry employees make. For every dollar spent in a Texas restaurant, she noted, there is more than twice that amount generated for the economy.
“We need to make sure that we're not putting ourselves in a bad position for future generations in terms of deficits and that sort of thing,” Streufert said. “But we also need to look at what's going to make our economy stronger overall.”
An election-year gimmick?
Jay Bunda, an Austin-based restaurateur who co-owns the Galaxy Café and Top Notch restaurants and was previously a general manager at Chuy’s Tex-Mex and Hula Hut restaurants, said he has doubts about how the policy would work in practice.
In conversations he’s had with some tipped employees, Bunda said they think the change will mean more money on their paychecks because they’re being taxed less on tip income. The reality, he said, is that the policy only affects year-end tax returns.
“Most of the people knee-jerk think, ‘Oh, wow, this is going to be great’ until they understand or realize that it's not going to work the way they all think it's going to work,” he said.
He added that tipped employees who traditionally report only the bare minimum in tip income will now be forced to do the opposite.
“They're going to find themselves somewhere in the middle just to get some sort of a tax break at the end. But on the other hand, I don't know how many people are going to follow through on all this,” he said.
Instead, Bunda said the proposal is an election-year ploy to court voters that Trump and other Republicans need in November.
“[Trump] is having a hard time getting support from that age range — in the 20s and in the 30s — and that's how he thinks he's going to get it,” he said.
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