Two U.S. Senators have proposed tax-cutting legislation intended to stimulate the economy and to help the business community and travel industry recover from the September 11th terrorist attacks.

Eliminating the Federal Tip Tax
U.S. Senator Bob Smith (R-New Hampshire) has introduced a bill that would permanently eliminate the federal income tax on tips and other service gratuities. Sen. Smith stated that he would also be offering the legislation as an amendment to the economic stimulus bill (S. 629) currently being considered by the Senate. [Also See: Operation Economic Stimulus]

In a press release, Sen. Smith said, "In the wake of the September 11th attacks and the economic decline of the business community, particularly the travel industry, many hardworking Americans must supplement their often, minimum wage incomes, with tips received for their excellent service. However, this discriminatory tax is levied against those who can least afford it. We must address this unfairness in the tax code and provide direct relief to hardworking Americans."

Smith's proposal would exempt a worker's first $10,000 in tips earned during the year from taxes. Under current law, service-sector employees who typically receive tips are assumed to have earned at least 8 percent of their gross income in tips. Taxes are applied regardless of the employees' actual earnings in tips. The end result for these employees is that they may have to pay taxes on income they didn't receive.

Should the bill or amendment be approved, the federal government will provide direct relief to at least 2.3 million low to middle income individuals who depend on tips to make ends meet, according the Sen. Smith.

One Month Payroll Tax Holiday
U.S. Senator Pete Domenici (R. - New Mexico) has introduced a bill that would exempt employees and employers from the federal payroll tax for one month. The bill, according to Sen. Domenici would help stimulate the sagging U.S. economy by resulting in more take-home pay for workers and giving employers a break from paying the tax on their employees.

The one-month payroll tax holiday would apply to workers earning less than $80,400 per year, and would pump some $40 billion into the economy, according to Sen. Domenici's office.

The Domenici plan would suspend for one month the Social Security (OASDI) payroll tax now paid by both the employee and employer--6.2 percent each. Self-employed social security payroll taxes, 12.4 percent, would also be suspended. The payroll tax holiday would also benefit state and local governments for the payroll taxes they pay. Social Security benefits would be un affected by the Domenici plan.

"A payroll tax holiday is truly a stimulative, temporary tax cut that is very likely to be spent. Employees would have more take home pay and employers would have increased cash flow," Domenici said.

"This is a quick, easy and simple way of getting more money flowing into the economy. A payroll tax holiday in December would be perfectly timed for the holiday shopping season. There would be no delays for cutting rebate checks or any interference with the IRS' ability to process 2001 tax returns," he said.

According to Sen. Domenici, school teachers earning $40,000 annually would realize a $207 increase in their December take-home pay.