Make Permanent the Deduction of Tip Income from Taxable Income

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.