The pitch is aimed straight at the diner counter and the factory floor. On June 30, House Majority Leader Steve Scalise, standing with the Speaker, said "about 30 million Americans have taken advantage of no tax on tips and no tax on overtime," and that it means "more money in their pockets today that they didn't have a year ago." [1] The number is not made up. What it hides is who actually gets the money, and who is left out.
Read the fine print the way a worker would
Start with what the deduction touches. It cuts only federal income tax. [2] The payroll tax, the roughly 7.65 percent taken out of every check for Social Security and Medicare, still comes out of every tipped and overtime dollar, untouched. [2] The break is also capped, at $25,000 in tips and $12,500 in overtime, and it phases out for higher earners, and it expires after 2028. [2] A tax cut that vanishes from the lowest paychecks and sunsets in three years is a narrower thing than "no tax on tips."
The workers it was named for are the ones it skips
Here is the part that should bother anyone who works for tips. To benefit from a deduction against federal income tax, you have to owe federal income tax. Many of the lowest-paid tipped workers do not. The Budget Lab at Yale found that 37 percent of tipped workers earned too little to owe any federal income tax, which means the tips deduction does exactly nothing for more than a third of them. [3] Tipped workers are only about 1.7 percent of the whole workforce to begin with, some three million people. [4]
Data
| Owe no federal income tax (get nothing) | 37% |
|---|---|
| Could get some benefit | 63% |
The overtime break tilts up, not down
The overtime side tells the same story. More than 90 percent of workers do not work the kind of qualifying overtime the law covers, so they get nothing from it at all. [5] Among those who do benefit, the money runs uphill: the Tax Policy Center estimates about 85 percent of the overtime tax break flows to the top 40 percent of taxpayers, while the bottom 40 percent see somewhere between zero and twenty dollars. [5]
Data
| Top 40 percent of taxpayers | 85% |
|---|---|
| Bottom 60 percent | 15% |
The bottom line
Thirty million people claiming a deduction is not the same as thirty million working families getting real relief, and the design makes sure it is not. The break leaves payroll tax on every hour, caps out, sunsets, skips more than a third of tipped workers entirely, and sends most of the overtime money to people who were never waiting tables. It can be sold at the diner counter. It was mostly written for somewhere else.
