If enacted, HB7870 would provide significant financial benefits to workers in industries with tip-based income, primarily aiding those affected by economic hardships. By lifting the tax liabilities on the first $20,000 in tips, workers could retain a more substantial portion of their earnings, which may contribute positively to employment retention and job satisfaction in affected sectors. Additionally, this bill includes a provision that ensures the Federal Old-Age and Survivors Insurance Trust Fund, the Federal Disability Insurance Trust Fund, and the Federal Hospital Insurance Trust Fund are shielded from revenue reductions incurred due to this legislation.
Summary
House Bill 7870, known as the 'Tip Tax Termination Act,' proposes amendments to the Internal Revenue Code of 1986 by exempting certain tips from income and employment taxes for a duration of five years. This legislation specifically targets individuals receiving tips in sectors such as cosmetology, hospitality, and food service, with a cap set at $20,000 of eligible tips within a taxable year. The objective is to alleviate tax burdens on service workers who rely heavily on tips, thus potentially increasing their take-home pay during this period.
Contention
While the bill may be viewed favorably by service industry workers and their advocates, there are some points of contention regarding fiscal responsibility and potential impacts on federal revenue. Critics may argue that exempting tips from taxation could lead to increased budget deficits, affecting government services and resources. Further, the long-term implications of altering income tax policies could draw scrutiny, as this may set a precedent for future tax legislation that favors specific employment sectors over others.
Tip Tax Termination Act This bill excludes from gross income for federal tax purposes up to $20,000 of eligible tips received during the tax year. The bill also requires the Internal Revenue Service to modify the tables and procedures used to withhold federal income tax from wages to take into account eligible tips excluded from gross income. The bill defines eligible tips as amounts received while performing services in a position that generally relies on tips as part of wages, including cosmetology, hospitality, and food service.Further, under the bill, the amount of eligible tips excluded from gross income must not be included in determining federal tax deductions or credits, except for purposes of calculating the child tax credit and earned income tax credit.Finally, the exclusion from gross income only applies to eligible tips received before 2030.