Restaurant server
When policymakers’ ambition to pass big tax cuts collides with the need to limit the cost, the inevitable loser is simplicity. People may get a tax cut, but they’ll battle more paperwork to get it.
Case in point: the struggles of congressional Republicans to downsize President Trump’s many campaign tax promises.
Congressional Republicans are straining to balance multiple, often-conflicting goals in a big 2025 tax bill. They want to extend the 2017 Tax Cuts and Jobs Act and enact some form of Trump’s ideas such as tax-free tips and overtime. But while the House and Senate budget frameworks allow trillions of dollars in largely-unfunded tax cuts, open-ended versions of Trump’s plans would exceed even those targets.
To strike a balance, GOP leaders are exploring ways to limit the costs. But that means adding complexity to an already confusing tax code.
The result may be that getting some of Trump’s proposed tax breaks may depend on how much tax-favored income you earn, how much money you make overall, and even what you do for a living.
The Cost of Complexity
Complexifying means more work for taxpayers and their paid preparers. More than that, people lose confidence in tax laws they can’t understand.
Adding complexity will be especially challenging given the number of IRS employees fired by the Trump Administration and the many who have resigned in recent months. And new regulations also could run afoul of a 2024 Supreme Court ruling that limits the ability of federal agencies to interpret the law.
Nonetheless, lawmakers are forging ahead with less costly, but more complicated versions of Trump’s campaign promises.
Tax-Free Tips
For example, Trump wants to make tips tax free. While he’s never said how, the Tax Policy Center estimates that exempting all tips from income tax would reduce federal revenue by $6.5 billion in 2025 alone.
To lower the cost, Sen. Ted Cruz (R-TX) has introduced a limited version with multiple provisions that would make the law more complicated. For example:
- Workers couldn’t deduct more than $25,000 in tips, and those making more than $160,000 would lose the deduction entirely.
- Only cash tips from “employment in an occupation which traditionally and customarily received tips on or before December 31, 2023” would be deductible. What does “traditionally and customarily” mean? Cruz’s bill doesn’t say. The Treasury Department would need to provide the answer with new regulations.
- Owners of establishments such as barbershops, hair and nail salons, and massage therapy could take a business tax credit for their share of payroll taxes on tips. Currently, the credit is available only to bar and restaurant owners.
Working Overtime
Lawmakers are doing the same with Trump’s plan to exempt overtime from tax. As with tax-free tips idea, Trump has offered no details. However, the Yale Budget Lab estimated that one version could cost as much as $866 billion over 10 years
To reduce that price tag, GOP lawmakers are exploring scaled-back, and presumably cheaper, versions. For example, Rep. Don Bacon (R-NE) has introduced a slimmed-down version of tax-free overtime that would allow workers to deduct OT pay, but only up to 20 percent of their other wages from the same employer.
In addition, unmarried workers could take the deduction only if they make $100,000 or less in annual adjusted gross income while a married couple filing jointly would be eligible only if they make $200,000 or less.
Because income cliffs like these generally are a bad idea (you get the full deduction if you make $100,000 but get nothing if you make $100,001), Congress likely would add some phase-outs to Bacon’s bill. And that would make matters even more complicated.
To limit gaming by workers who generally do not receive overtime pay, Bacon would use the Fair Labor Standard Act of 1938 definition of overtime. That might prevent some workers and their employers from recategorizing regular wages as overtime but it brings its own set of complexities.
Another version, proposed by Senator Roger Marshall (R-KN) and others, is somewhat different. Instead of a wage limit, it would cap the deduction to $10,000 for unmarried taxpayers and $20,000 for couples. It includes income limits similar to Bacon’s, but with phase-outs. Marshall’s bill also creates its own definition of overtime which would require more new rules and inevitably exclude some workers from the tax break.
Unpleasant Surprises
Even with these limitations, lawmakers likely are looking at cutting taxes by roughly $4 trillion to $5 trillion over 10 years by extending the individual provisions of the 2017 Tax Cuts and Jobs Act, approving some version of Trump’s proposals, and adding special interest provisions they’ll need to win votes in the narrowly divided Congress.
If Congress succeeds in shoehorning all these ideas into a single piece of legislation, some households will be happy to get a lower tax bill. But they may not be so pleased when they first have to sort through a complicated set of rules to figure out how much of a tax break they get. Or perhaps learn they are not eligible for the new tax benefits at all.
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