A waiter serves drinks outside a restaurant. (Photo by Jeenah Moon/Getty Images.)
Last week, Ohio state Rep. Jay Edwards of Nelsonville introduced a bill to declare intent to exempt tips and gratuities from income tax.
This comes a month after Donald Trump announced his intention to exempt tips from income taxes if elected president this year.
On its face, exempting tips from income taxes makes sense for someone trying to ease the burden for low-income workers. Edwards represents a swath of southeast Ohio that contains some of the poorest counties in the state, including Athens County, which consistently ranks as the poorest county in the state, even after adjusting for its large population of college students . Providing support for low-income workers makes sense here.
Exempting tips from income taxes, however, has been panned by analysts at think tanks across the political spectrum, from the conservative Tax Foundation to the liberal Center for American Progress .
Howard Gleckman is one of the most thoughtful and pointed analysts of tax policy in the country. He is a Senior Fellow for the Urban-Brookings Tax Policy Center, the leading tax policy think tank in the country.
Gleckman wrote about the problems with exempting tipped wages from income taxes in a commentary last month. The most straightforward problem with the proposal is that low-income workers often do not have large tax liabilities, if they have any at all.
In Ohio, the average waiter or waitress makes only $33,930 per year . Since Ohio only starts taxing income at $26,050 , this means many waiters and waitresses are not paying income tax in the first place. Couple this with credits like the state Earned Income Tax Credit which reduce tax liability and this problem becomes more acute.
This is not a death knell to the policy’s potential effectiveness for low-income workers, however. Edwards’s proposal is currently abstract. By designing the policy as a refundable credit, this equity problem with the policy could be overcome.
Another problem Gleckman raises with exempting tips from income taxes is the policy’s potential to compete with a more effective policy for supporting tipped workers: equalization of tipped minimum wage with standard minimum wage.
Ohio’s most viable minimum wage proposal is a citizen initiative called the Ohio Minimum Wage Increase Initiative . It failed to qualify for the ballot for 2024 but may be on the ballot in November of 2025. This minimum wage initiative would increase the state minimum wage for all occupations to $15. This would have a significant impact on non-tipped minimum wage workers, who currently make $10.45 an hour , but would have a larger impact on tipped workers, whose current minimum wage is $5.25.
While eliminating income taxes for tips will help many high-wage tipped workers (like waiters and waitresses at high-end restaurants), it is likely not the best tool for providing relief for low-income workers. Expansion of the state earned income tax credit or increasing the state minimum wage are much more likely to support low-income workers as a whole. That being said, it is encouraging to see policymakers focusing on the plight of low-income workers and working to design policy to support them.
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