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Option 35:

Make Permanent the Deduction of Tip Income from Taxable Income

Topline Estimates

Gross Domestic Product (GDP)
+<0.05%
Gross National Product (GNP)
+<0.05%
Full-Time Equivalent Jobs
+34K
Wage Rate
+<0.05%
Capital Stock
+<0.05%
Conventional Primary Deficit Change (10‑Yr)
+$45.9B
Dynamic Primary Deficit Change (10‑Yr)
+$20.9B
Dynamic Total Deficit Change (10‑Yr)
+$24.8B

Source: Tax Foundation General Equilibrium Model.

The One Big Beautiful Bill Act of 2025 created a deduction for qualified tips received in occupations that customarily and regularly receive tips for tax years 2025 through 2028. The maximum annual deduction is limited to $25,000, and the deduction phases out when modified adjusted gross income exceeds $150,000 for single filers or $300,000 for joint filers. The deduction complicates the tax code, worsens equity between workers who make similar income but through different forms of compensation, and incentivizes tipped income over other types of taxable compensation. The deduction lowers marginal tax rates on tipped income, but because the deduction phases out, it raises marginal tax rates on workers with income in the phaseout range.

This option makes the deduction for qualified tips permanent. On net, the deduction would have a slightly positive effect on economic output by reducing marginal tax rates on tipped income.

On a conventional basis, this option would increase the primary deficit by $45.9 billion over the budget window. Long-run GDP and GNP would rise slightly. On a dynamic basis, the primary deficit would increase by $20.9 billion from 2027 through 2036, $25.0 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would reach 176.0 percent by 2056.

On average, in 2036, taxpayers would see increases in their after-tax incomes of less than 0.05 percent. Taxpayers in the second and third quintiles would see the largest benefit.

Modeled Results

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About the Authors

Erica York Tax Foundation
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Erica York

Vice President of Federal Tax Policy

Erica York is Vice President of Federal Tax Policy with Tax Foundation’s Center for Federal Tax Policy. Her analysis has been featured in The Wall Street Journal, The Washington Post, Politico, and other national and international media outlets.

Garrett Watson Tax Foundation
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Garrett Watson

Director of Policy Analysis

Garrett Watson is Director of Policy Analysis at the Tax Foundation, where he conducts research on federal and state tax policy. His work has been featured in The Washington Post, The Atlantic, Politico, the Associated Press and other major outlets.

Huaqun Li Tax Foundation
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Huaqun Li

Senior Economist, Director of Modeling Projects

Dr. Huaqun Li is Senior Economist, Director of Modeling Projects at the Tax Foundation. She focuses on developing and maintaining the Foundation’s Taxes and Growth Model, which models the budgetary and economic effects of changes to federal tax policy.

William McBride or Will McBride Tax Foundation
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William McBride

Chief Economist & Stephen J. Entin Fellow in Economics

Dr. William McBride is the Chief Economist & Stephen J. Entin Fellow in Economics at the Tax Foundation, where he oversees major research projects primarily related to reforming the federal tax code, advancing sound tax policy, and improving the federal government’s fiscal outlook.

Alex Durante Tax Foundation
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Alex Durante

Senior Economist

Alex Durante is a Senior Economist at the Tax Foundation, working on federal tax policy and model development. Alex worked as a research assistant at the Federal Reserve Board and served as a staff economist on the Council of Economic Advisers.

Alex Muresianu Tax Foundation
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Alex Muresianu

Senior Policy Analyst

Alex Muresianu is a Senior Policy Analyst at the Tax Foundation, focused on federal tax policy. Previously working on the federal team as an intern in the summer of 2018 and as a research assistant in summer 2020. He attended Tufts University, graduating with a degree in economics and minors in finance and political science.

Peter Van Ness Tax Foundation

Peter Van Ness

Research Software Developer

Peter Van Ness is a Research Software Developer at the Tax Foundation working on federal tax policy and model development. Peter previously worked as a research assistant at another think tank and as a data analyst at a consulting firm.

Aleksei Shilov Tax Foundation Research Software Developer

Aleksei Shilov

Research Software Developer

Aleksei Shilov is a Research Software developer at the Tax Foundation working on economic model development and federal tax policy. Aleksei joined the Tax Foundation as an intern in January 2025. He holds a B.S. in computer science and a minor in economics from Northeastern University and is currently based in Boston, MA.

Daniel Bunn Tax Foundation President & CEO
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Daniel Bunn

President and CEO

Daniel Bunn is President and CEO of the Tax Foundation. Daniel has been with the organization since 2018 and, prior to becoming President, successfully built its Center for Global Tax Policy, expanding the Tax Foundation’s reach and impact around the world. Prior to joining the Tax Foundation, Daniel worked in the United States Senate at the Joint Economic Committee.