Texas leads the nation in small business growth, with these enterprises employing 45% of all Texans and contributing significantly to the state’s $2.4 trillion Gross Domestic Product (GDP).
Recently, the Texan small business landscape has been stirred by a proposal from Sen. Ted Cruz (R-TX) and Reps. Jodey Arrington (R-TX) and Beth Van Duyne (R-TX) to end taxation on tips, effectively making them non-taxable income. Both presidential candidates now support this move.
This discussion highlights a longstanding inequity in the tax code — the disparate treatment of restaurant and bar workers compared to hair stylists, barbers, massage therapists, and nail technicians.
Congress has not provided a leveled tax playing field for these service workers. This disparity proves costly for Texas given that the Lone Star State employs more hairdressers, hairstylists, and cosmetologists than any other U.S. state.
While passing Reps. Arrington and Van Duyne’s bill is a step in the right direction to providing tax equity for Texas’ beauty industry workers, more works needs to be done to make the tax code fair and equitable for their businesses.
Under the current tax code, salon, barbershops, and hairdressing business owners must also pay taxes on their workers' tips despite the fact that restaurant owners are exempt from this requirement. This reality costs the Texas economy handsomely each year.
Another recent bill, H.R. 45 – The Small Business Tax Fairness and Compliance Simplification Act, aims to end this unequal treatment on the business owner side of things. This bipartisan legislation extends the same tax credits provided to restaurant owners to entrepreneurs in the beauty services industry.
Many Texans can significantly benefit from this change. By providing tax relief for small business owners and making tips non-taxable income, these historically low-return businesses will have one of the significant financial burdens they face disappear with the stroke of a pen.
A socio-demographic group of interest to many Texas policymakers will receive a disproportionate amount of the benefits. That is because, according to the U.S. Census Bureau, 56% of Texas salon businesses are women-owned, and almost 48% are minority-owned. This tax relief will promote labor and social inclusion among minority groups that already face challenges in the labor market.
Workers and consumers will see an increase in their disposable income too because, instead of these dollars getting taxed and lost in the large ocean of federal spending, businesses will have more to hand out in raises and for business development expenses. The more they disperse, the more the Texas economy will mature and grow.
While Texas’ low tax rates and reasonable regulatory environment have already set the national standard for how to foster a thriving small business environment, the No Tax on Tips Act and Small Business Fairness and Compliance Simplification Act will help the state maintain this positive momentum.
Because Texas Sen. John Cornyn and Reps. Arrington and Van Duyne serve on Congress’ powerful tax-writing committees, there’s a chance that these bills sponsored by the Texas delegation will get passed into law, too.
By pushing for this tax cut, all of these members, who have received the Guardian of Small Business award, will help tremendously in driving Texas’ economy forward.
About the Author
Nicolas Cachanosky is Associate Professor of Economics at The University of Texas at El Paso and Senior Fellow at the American Institute of Economic Research (AIER)
