Tipping has essentially become a hidden surcharge, allowing businesses to direct more money to their workers without bearing the cost themselves. For instance, Starbucks introduced a tip prompt for credit and debit transactions in late 2022, and according to CNN, about half of the customers complied with a tip. This is likely a much higher percentage compared to those who used to drop bills or coins into a traditional tip jar.

Previously, tipping required extra effort. Now, at Starbucks and many other coffee shops, food trucks, and retail settings, you have to go out of your way not to tip. In some cases, tipping prompts appear in unexpected places like self-checkout machines at Newark Airport or at a pick-your-own strawberry farm.

While you can opt to hit “no tip” or enter a custom tip of “$0.00” when faced with these prompts, many customers end up “guilt tipping” and selecting one of the suggested amounts due to the social pressure of being watched by the cashier and other customers. About a third of Americans (34 percent) have expressed annoyance at pre-entered tip screens, and a similar percentage (35 percent) believe that tipping culture is out of control.

Inflation is a key part of the story

Many customers are frustrated by the rising prices in recent years, and tip requests—especially in unconventional settings—add insult to injury.

Tipping frequency has even declined in traditional settings like sit-down restaurants, where only 67 percent of diners always tip, down from 77 percent in 2019. With inflation eating into their paychecks, Americans have less disposable income and aren’t feeling particularly generous about tipping.

Businesses, too, are grappling with inflation, facing higher costs for rent, utilities, wages, materials, and insurance.

The labor component is particularly noteworthy. While the federal tipped minimum wage has remained at $2.13 per hour since 1991, many states and cities have instituted higher minimum wages for both tipped and non-tipped employees. In 2024 alone, 22 states raised their minimum wages, impacting about 10 million workers, according to the Economic Policy Institute.

California, for instance, now has a $20 per hour minimum wage for fast-food workers. While the cost of living in California is high and a living wage is essential, there are unintended consequences.

The fast-food industry has already shed about 9,500 jobs, according to the Hoover Institution. As labor costs rise, businesses are cutting corners by employing fewer workers and relying more on automation, such as touch screen ordering systems instead of human cashiers. Consequently, prices at fast food chains across California have risen “widely and steeply,” according to a report from Datassential.

There are significant unintended consequences to Donald Trump’s proposal to exempt tips from federal income taxes if he regains the presidency in the upcoming election. While this might seem beneficial for service industry workers, the potential negative impacts could be substantial.

Firstly, the Committee for a Responsible Federal Budget estimates the proposal would reduce government revenues by $150 billion to $250 billion over 10 years. This could lead to a higher deficit, cutbacks in other areas, or both.

The plan might also encourage employers to increase the number of workers subject to the much lower tipped minimum wage, using the lower tax as justification. However, this lower base wage means a significant portion of workers’ earnings would depend on customer tips. If there aren’t enough customers or if tips are inadequate, workers would suffer.

Many service-industry workers left during the pandemic and never returned, as working for tips is precarious. Little is guaranteed, and workers often face rude, sexist, or racist customers.

Even before the pandemic, renowned restaurateur Danny Meyer recognized these issues and attempted to eliminate tipping by raising prices and distributing the revenue more equitably. However, customers were put off by the higher prices, and some employees believed they could earn more elsewhere. As a result, the policy was abandoned, and tipping was reinstated.

Tipping is here to stay. With technology making it easier than ever for companies to solicit tips and rising business costs, organizations are keen to shift the burden of employee compensation onto customers. Even as wages rise, companies continue to use tips to supplement workers’ pay. They support higher wages, as long as it doesn’t come out of their pockets.

If tips are no longer taxed, it might encourage more businesses to classify employees as tipped workers. However, be careful what you wish for: relying on a base salary of $2.13 per hour and depending on customer generosity is a precarious way to make a living.