Lawrence A. Zelenak (Duke; Google Scholar), Why Nix Tip Tax Now?, 185 Tax Notes Fed. 237 (Oct. 14, 2024):

In this article, Zelenak explores why — more than 100 years after a Treasury regulation declared tips taxable — proposals to exempt tips from federal income tax are only now politically viable, and he examines the design challenges faced by the drafters of proposals to exempt tips.

Conclusion
This article has had two aims. The first has been to suggest an answer to a puzzle: Why, after more than a century of the de jure income taxation of tips, did a statutory exclusion for tips become a hot political topic in 2024? Although part of the answer surely depends on the particular circumstances of the 2024 presidential election — including the improvisational nature of Trump’s policy proposals and the happenstance of the state with the highest percentage of tipped workers in its labor force being an Electoral College battleground state — another part of the answer depends on the great improvement in tip tax compliance and enforcement resulting from the almost complete victory of charge (both credit and debit) over cash as the medium of payment for restaurant tips.

The article’s second aim has been to explain that a great deal of design complexity is obscured by the simple slogan, “No taxes on tips.” Drafters of tip exemption statutes are faced with several difficult policy choices in turning that slogan into law. The design challenges in pursuing the tip exemption are great — so great, in fact, as to suggest it may be a road better left untraveled.

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