Ask your average American which corporations pay the lowest tax rates and they’ll probably point to the industries most notorious for shifting profits offshore: big pharmaceutical and tech companies – and obviously Amazon. But a new ITEP report is a reminder that, thanks to the recent wave of tax breaks enacted by Congress, virtually any industry can avoid paying the 21 percent corporate tax rate – even the restaurant chains that dot the American strip-mall landscape.
ITEP’s report identifies half a dozen Fortune-1000 companies in the restaurant sector that were able to shelter at least half of their U.S. profits from federal income tax last year. This includes Cheesecake Factory, Brinker (the parent company of Chili’s), Darden Restaurants (Olive Garden), Bloomin’ Brands (Outback Steakhouse), Cracker Barrel Old Country Store, and Texas Roadhouse. The six companies collectively disclosed $2.5 billion of U.S. profits last year on which they paid tax rates averaging 5.4 percent, far below the statutory 21 percent.
This means the six companies enjoyed $393 million of federal income tax subsidies – and almost 95 percent of them are attributable to just one obscure tax break, the payroll tax tip credit.
Enacted in 1993 as part of the Clinton administration’s big tax bill, the tip credit was designed to encourage compliance with a 1987 law requiring companies to pay the employer payroll tax on their employees’ tip income. (Tipped workers already had to pay their half of the payroll tax on their tips for decades before 1987, so this law basically leveled the payroll tax playing field between workers and employers.) The credit gave employers a corporate income tax credit equal to 7.65 percent of their workers’ reported tips, excluding the portion of tips needed to bring their employer-paid wages up to $5.15 an hour. The idea was to incentivize employers to report this income so that it could be subject not just to the payroll tax, but to the federal personal income tax.
As computerization made it easier to track tip income, and tips themselves more frequently were paid using credit cards instead of cash, the hoped-for reporting incentive effect of the credit became less obvious. The Obama administration’ fiscal year 2016 budget proposal included a proposal to repeal the credit outright, arguing that it “costs far more than any positive effect on tax compliance” and creates a perverse incentive for employers to pay their workers less wages and force them to rely more on tips. The Joint Committee on Taxation’s (JCT) analysis of the proposal shared the administration’s dim view of the tip credit, noting that “any positive revenue effect of the increased compliance is small compared to the tax expenditure associated with the credit.”
But the Obama plan was roundly ignored by Congress and was rejected again the following year. The Biden administration chose not to pursue this reform, and President Trump, in a classic “hold my beer” moment, flipped the script by proposing to expand the FICA credit to include barbershops and nail salons while adding a personal income tax subtraction for some tip income. Both of these revenue-losing proposals were included in the so-called “One Big Beautiful Bill Act” in 2025, and the largest publicly-traded company in the barbershop space, Regis Corporation, has already disclosed using the newly expanded credit to offset almost all its federal income tax.
The estimated cost of the tip credit has grown even as its policy rationale has evaporated. The JCT now pegs the fiscal year 2025 cost of the corporate FICA credit at $900 million nationwide – and the six big companies presented here represent close to half of that total. And the case for subsidizing tip reporting is even harder to defend now that Congress has created a second tax preference for the same income, allowing eligible workers to deduct up to $25,000 in reported tips on their federal tax forms.
As it turns out, this isn’t the first time federal tax breaks have created surprisingly low tax rates for our favorite restaurant chains. Back in 2017, we reported that Cheesecake Factory was claiming substantial manufacturing deductions despite obviously not being that kind of factory.
While overall the federal corporate income tax is more loophole than law, the tip credit is far from the most important factor making it so. But the ease with which the nation’s most popular restaurant chains can erase their corporate tax bills using a tax credit that encourages them to pay their workers less is a double slap in the face to Americans’ sense of how a fair economy should work.
