“No taxes on tips”: The latest scam to keep wages for working people low

Over the last 87 years – particularly during the 20th Century – few innovations in the American economy have done more to lift up average working people than the minimum wage.

As it was first conceived and applied, the federal minimum wage law sought to assure that a person who worked full-time was paid enough to support their family. And for many decades, the minimum wage actually worked that way for many people.

Unfortunately, in recent decades—thanks to opposition from corporate America and its allies on the political right—the federal minimum wage has long since ceased providing a living wage. Indeed, it’s now been more than 16 years since the minimum wage was raised to $7.25 per hour—a rate that was inadequate in 2009 and that is downright absurd in 2025.

But wait, it gets worse. If you’re someone who works for tips, the minimum wage (the so-called sub-minimum wage) is an astonishing $2.13 per hour.

Not surprisingly, as journalist Eyal Press reported in a recent New Yorker magazine article entitled “’No taxes on tips’ is an industry plant,” “the poverty rate among tipped workers is more than double the rate of other employees. Tipped workers are also more likely to rely on food stamps and other federal assistance.”

And while many states and cities have gone ahead and raised their minimum wages to much higher levels in recent years, in most others—including North Carolina—it’s still legal to pay the pitiful sums of $7.25 and $2.13 per hour. In case you don’t have a calculator handy, those wages would provide gross annual sub-poverty incomes for a full-time worker of $15,080 and $4,430.

All of which brings us to the latest conservative scam to keep the federal minimum wages at their current inadequate levels: the “no taxes on tips” law.

As you’ve probably heard by now, one of the provisions in the massive budget reconciliation bill passed by Republicans in Congress and signed into law by President Trump on July 4 alters federal law to mirror a gimmick floated by Trump during the 2024 campaign by exempting tips from federal income taxes.

North Carolina House Republicans proposed a similar provision in their version of a state budget earlier this year.

One must admit that it’s a superficially appealing idea. After all, the notion that a waitress scrambling to get by on tips and a legal wage $2.13 per hour would be required to pay income taxes is undeniably crazy.

But, of course, as is the case with so many proposals floated by Trump, a closer look reveals that there’s much less there than initially meets the eye.

As researchers at the Economic Policy Institute and North Carolina Budget and Tax Center have documented in a pair of recent briefs, the “no taxes on tips” idea benefits comparatively few workers.

Analysis from EPI shows that the law will benefit between 2.5 and 5.2 million tipped workers who will receive an income tax deduction before the policy expires in 2028. The average tax benefit would amount to $1,700 annually during the four years the bill would be in effect. Notably, however, the policy would disproportionately benefit the top 20 percent of all tipped workers, who would receive an average tax cut of over $5,700. Because so many tipped workers have incomes too low to have any federal income tax liability, the bottom 20 percent of all tipped workers would receive an annual average tax cut of just $74.

Meanwhile, the BTC reports that the North Carolina House proposal would provide tipped workers with a maximum annual tax savings of just under $200.

In contrast, a bill introduced in Congress earlier this year to incrementally raise the federal minimum wage to $17 per hour by 2030 while doing away with the sub-minimum wage (“The Raise the Wage Act”) would benefit nearly 23 million workers (or about 15% of the workforce) with an average annual boost in wages of $3,200. All told, workers would realize a $70 billion gain in wages.

Industry lobbyists—particularly for the restaurant industry—claim of course that such a change will lead to economic Armageddon, but as economist Michael Reich told the New Yorker’s Press, experience in jurisdictions that have already raised the minimum wage shows that that’s just not the case. Yes, a higher minimum wage will cause restaurant prices to rise to a degree and employment in the industry may decline slightly, but overall, workers will be much better off.

And more to the point, as Sally Hodges Copple of the BTC told me in a recent interview, the vast majority of struggling low-income workers in desperate need of a raise (e.g. child care workers, retail workers) do not receive tips.

In short, the answer to what plagues low-income workers in our country—whether they work for tips or not—is to once again make the minimum wage a living wage. The decision of conservative law and policy makers to promote a low-impact scheme like “no taxes on tips” is just the latest in an endless line of scams designed to distract from what really matters, and ultimately, to keep wages for working people unjustly low.