S-2780-119
Read twice and referred to the Committee on Finance.
Sponsored by Ruben Gallego (D-AZ)
What it does
This bill would expand an existing federal income tax deduction for tip income — currently available for tax years 2025 through 2028 — by redefining which tips qualify. Under current law, only tips that are voluntarily given, customer-determined, and nonnegotiable are eligible for the deduction of up to $25,000 per year. This bill would treat automatic gratuities added to a customer's bill (such as large-party service charges) and suggested tips prompted by a business (such as pre-set tip options on a payment screen) as if they were voluntarily paid, making them eligible for the same deduction.
Who benefits
Tipped workers in the food service, hospitality, and personal care industries who regularly receive automatic gratuities or suggested tips — particularly servers at restaurants that apply mandatory large-party gratuities. Workers at establishments that use point-of-sale systems with pre-set tip prompts. Higher-earning tipped workers who receive large-party gratuities as a significant share of their income. Employers who use automatic gratuity systems, as the change may reduce friction around those compensation structures.
Who is hurt
Federal taxpayers broadly, to the extent the expanded deduction reduces federal revenue. Workers in non-tipped occupations who receive no equivalent deduction for their wage income. Tipped workers who receive only traditional voluntary tips and already qualify under existing law — they gain no additional benefit. State governments that conform to federal tax definitions may see reduced state income tax revenue as well, depending on their conformity rules.
Supporters argue
Supporters argue that the distinction between a voluntary tip and an automatic gratuity is largely administrative — in both cases, the worker performs the same service and receives the same type of compensation. They contend that excluding automatic gratuities creates an arbitrary inequity among tipped workers, penalizing those whose employers use large-party service charges rather than relying on customer discretion, and that the fix aligns the deduction with the economic reality of how tips are actually paid in modern service industries.
Opponents argue
Opponents argue that automatic gratuities and suggested tip prompts are fundamentally different from voluntary tips — they are effectively mandatory service charges or employer-influenced payments, not freely given customer gratuities. They contend that expanding the deduction to cover these payments stretches the original policy rationale, reduces federal revenue without a clear public benefit, and disproportionately advantages workers at higher-end establishments where large-party charges are common, rather than lower-wage tipped workers the deduction was intended to help.
Constitutional context
No significant constitutional issue is presented by this bill. Congress has broad authority to define taxable income and allowable deductions under the Sixteenth Amendment and the Taxing and Spending Clause (Art. I, §8, cl. 1). The bill modifies an existing deduction within established statutory and constitutional bounds.
Checks and balances
Congress holds authority to define the scope of the deduction; the IRS would implement and enforce the expanded definition through existing tax administration; courts could review specific applications under the Due Process Clause if a taxpayer challenged the IRS's interpretation.
Historical precedent
The underlying tip income deduction this bill modifies was established for 2025–2028 as part of recent federal tax legislation; this bill represents an incremental expansion of that deduction's eligibility criteria rather than a novel policy.