On Tuesday, the Senate unanimously passed the No Tax on Tips Act, pushing one of President Donald Trump’s campaign promises one step closer to becoming law. The pledge to eliminate federal taxes on service and hospitality workers’ tips rallied voters in the 2024 election, so much so that even former Vice President Kamala Harris endorsed the idea in her campaign against Trump. Now, both Democrats and Republicans on Capitol Hill seem to want to make it a reality. It’s easy to see why “no tax on tips” has broad bipartisan support: It looks like a populist policy that gives lower-wage workers much-needed relief, and opposing it might make you seem out of touch with the working class. But as I wrote last year, “no tax on tips” would actually be more of a tax break for businesses that would cost the federal government an estimated $10 billion to $15 billion a year in tax revenue. In short, the policy incentivizes businesses to lower workers’ wages and make them rely more on tips. But that’s exactly the opposite of what workers — and tipped workers in particular — need. Tipped workers are underpaid. Some of them would certainly see their take-home pay increase if the federal government stops taxing them on tips, assuming that their wages stay the same. But tips can be volatile, and often vary by season, and a “no tax on tips” policy would make offseasons worse for tipped workers, who will likely be stuck with lower base pay. The reality is that the problem for tipped workers isn’t that their taxes are too high — it’s that their wages are far too low. Plus, not having their taxes tipped means workers might end up accruing less credit toward their Social Security. In fact, many underpaid workers won’t even see a difference from the policy. Some tipped workers — by some estimates more than a third of them — earn so little that they are already exempt from income taxes, which means that a “no tax on tips” law would do nothing to boost their take-home pay. More than that, “no tax on tips” doesn’t help out most low-wage workers: More than 95 percent of low- and moderate-wage workers don’t receive tips on a regular basis. So while Congress busies itself with flashy tax cuts that won’t go too far in helping low-wage workers, it might be better to focus on the root cause of tipped workers’ problem: the subminimum wage.What is the subminimum wage and why is it so low? The last federal minimum wage increase was in 2009, and it’s been the same since: $7.25 per hour. Many states have minimum wages that are higher than the federal level — but most also have a subminimum wage for tipped workers. That’s a carveout that allows employers to pay their workers less so long as they make up the difference in tips, and that wage is just $2.13 per hour. If a subminimum wage worker doesn’t make enough tips to reach the full minimum wage, the employer is required to pay the difference. These tiered minimum wages date back to the Fair Labor Standards Act (FLSA), passed in 1938. The legislation created a subminimum wage with the intention of encouraging employers to hire people “whose earning capacity is impaired by age or physical or mental deficiency or injury.” The idea was to ensure that job opportunities and work training programs would still be available for people with disabilities. But in 1966, Congress amended the FLSA to include a subminimum wage for workers who regularly receive tips, hoping this would lower payroll costs for service-sector businesses. This change fundamentally changed the culture around tipping: While customers used to give workers tips as a show of gratitude, tips became a necessity for workers in order to make ends meet. Since then, workers in the service and hospitality sectors in most places have been subject to a subminimum wage that has not increased since 1991. While tipped wages are often sold to workers as a benefit — in theory, there’s no limit to how much they can make if customers are generous — the reality is that their overall take-home pay, even including tips, is often not enough. For example, the median wage for waiters in 2024 was $33,760, according to the Bureau of Labor Statistics, and the bottom 10 percent of waiters earned about $18,000. For context, the standard deduction — that is, the portion of your income that is untaxed — is $29,200 for a married couple and $14,600 for an individual. “No tax on tips” might give waiters a small tax break, but it’s hardly enough to work as a meaningful solution to low wages.The movement to abolish the subminimum wageMany workers have grown frustrated with the tiered minimum wage system, leading to the creation of organizations like One Fair Wage, which advocates for getting rid of the subminimum wage — a measure that would likely help alleviate poverty. (At least eight states have eliminated the subminimum wage for tipped workers.) And because a handful of states have already abolished the subminimum wage in favor of one equal minimum wage for tipped and non-tipped workers alike, we can see how the former holds workers back.According to an analysis by the Center for American Progress, tipped workers have a higher poverty rate in states with a subminimum wage compared to states that have abolished it. In states with the subminimum wage, 14.8 percent of tipped workers live in poverty. By contrast, those same workers have a poverty rate of 11 percent in states that have gotten rid of the subminimum wage. The biggest problem with the “no tax on tips” idea is that it will likely only suppress wages, which will ultimately hurt workers in the long run. There are better ways Congress can help low-wage workers than eliminating taxes on tips, including by expanding the standard deduction — giving a meaningful tax cut to all low-wage workers, not just those who receive tips — or by finally getting rid of the subminimum wage. And they might consider increasing the minimum wage while they’re at it. After all, a raise is long overdue. This story is written for the Within Our Means newsletter. Sign up here.See More: