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tipped minimum wage
No Taxes on Tips? There Are Better Ways to Help Low-Wage Workers
Raising the federal minimum wage and ending the subminimum wage for tipped workers are good places to start.
Aug 30, 2024
With the race for the White House heating up, a curious policy idea appeared seemingly out of nowhere: ending federal taxes on tips. While this policy shift may have wide appeal—most people aren’t going to say no to a tax cut—it would not translate into real benefits for workers struggling to make ends meet. In fact, it could do harm, and it may even deliver a new tax perk to the rich.
“No taxes on tips” makes us think it would benefit certain workers: the restaurant server pulling a double shift to pay the rent or a member of the cleaning staff at a major hotel chain. Surely these workers deserve better—and what could be better than giving them a chance to save on their tax bill?
It’s not so simple. For starters, tip workers make up a small fraction of the U.S. workforce—about 2.5%—and more than one-third of them do not even earn enough to pay income taxes in the first place. Cutting the federal tax does nothing for this group, except reduce the amount that they contribute to Social Security. Some of these workers could also lose out on other vital programs, like the Earned Income Tax Credit.
While there are still almost no details about how a tax-free tips policy would work, there is the very real possibility that wealthy earners would take advantage of any new system to shield their earnings from federal income taxes.
There are better options than a poorly designed “no tax” gimmick that leaves behind the majority of tipped and other low-wage workers. To win better pay for workers, we could start with raising the 15-year-old $7.25 federal minimum wage to at least $15 an hour. This would provide a more significant boost; about 1 in 8 workers earn less than $15, and most are in the states that have a $7.25 minimum wage.
What’s worse, tipped workers may be paid a subminimum cash wage by their employer that is as low as $2.13 per hour, an amount frozen in place in 1991 at the federal level. This is designed to benefit employers, not workers; the $5.12 difference between the federal minimum and subminimum wages is known as the “tip credit.” In effect, this is the portion of workers’ wages subsidized via customer tips.
These tip credits across the United States are at least $9 in nine states, and more than $11 in Delaware and Maryland. They represent enormous wage subsidies to employers for each and every hour a tipped worker works. It’s no wonder that consumers are showing signs of being “tip-tired”—it is past time to phase this policy out.
While there are still almost no details about how a tax-free tips policy would work, there is the very real possibility that wealthy earners would take advantage of any new system to shield their earnings from federal income taxes. Without adequate safeguards, some high earners would simply reclassify a portion of their income as tips. This would represent one more avenue for the wealthy to avoid paying their fair share.
Historically, the tipping economy has always been about denying workers a fair wage. It is a practice that dates back to the feudal systems of the Middle Ages and the post-Civil War period here in the United States, when white employers used it to deny formerly enslaved Black workers a fair wage for their labor. Today, tipped workers are often forced to deal with unexpected fluctuations in pay and scheduling and often lack access to employer-provided healthcare, paid sick leave, or holiday pay.
There are plenty of policies that would improve the lives of low-wage workers—raising the federal minimum wage, for starters, and ending the subminimum wage for tipped workers is a good place to start.
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Harris Urged to End Subminimum Wage, Not Just Taxes on Tips
"Focusing on tax relief distracts from the real solution: the need to end the subminimum wage, which is a direct legacy of slavery and contributes to the worst sexual harassment of any industry in America," said the president of One Fair Wage.
Aug 12, 2024
Economic justice advocates expressed appreciation for U.S. Democratic presidential nominee Kamala Harris' elevation of working class issues in her campaign at a rally in Las Vegas over the weekend, but called on the vice president to go beyond promises her Republican opponent has made and instead counter them with a plan to eliminate subminimum wages across the economy.
On Saturday, Harris expressed support for eliminating taxes for tips. The median tipped worker earns just $15,198 per year.
"It is my promise to everyone here when I am president, we will continue our fighting for working families of America including to raise the minimum wage and eliminate taxes on tips for service and hospitality workers," said Harris.
The vice president's pledge came weeks after One Fair Wage (OFW), a grassroots group fighting for policies that would "require all employers to pay the full minimum wage," published a report showing that ending taxes on tips would not help many of the people earning subminimum wages, as people across the restaurant industry and hundreds of thousands of workers with disabilities do—partially because many of these workers don't earn enough to pay income taxes in the first place.
"It's encouraging to see the Harris-Walz campaign focusing on the economy and the needs of tipped workers," said Saru Jayaraman, president of OFW, on Sunday. "The fact is two-thirds of tipped workers don't earn enough to pay income tax—and that's because of the racist, sexist subminimum wage that really should be the focus of Harris and [vice presidential candidate Gov. Tim] Walz's ire."
The report published in July by OFW—Short Changed: Ending Income Taxes On Tips Will Not Make Subminimum Wages Livable—was aimed at debunking the claim by Republican nominee Donald Trump and other Republicans, including Sen. Ted Cruz (R-Texas), that ending taxes on tips would meaningfully increase tipped workers' earnings.
A bill proposed by Cruz would leave out 95% of low- and middle-wage workers, the report noted, and "even among the one-third of tipped workers who would benefit from this tax relief, this tax relief would be experienced once a year at tax time, and would not relieve their need to pay rent and bills all year round."
Unlike exempting tipped workers from taxes, "providing these workers with a full, livable minimum wage with tips on top would significantly improve their economic stability and workplace safety," reads the report.
As Common Dreams reported in June, OFW dismissed Trump's pledge to eliminate income taxes on tips as "pandering" to low-income households, and the Culinary Workers Union Local 226 said that while "relief is definitely needed for tip earners... Nevada workers are smart enough to know the difference between real solutions and wild campaign promises."
David Dayen, executive editor of The American Prospect, noted that the culinary union supports eliminating the subminimum wage for tipped workers, which Nevada did at the state level last year.
"If Harris was looking to counter Trump's no taxes on tips, she could've endorsed ending the subminimum wage, which is much better policy," said Dayen.
The culinary union announced its endorsement of Harris last Friday, ahead of the vice president's rally, saying its members believe Harris will "tackle issues that are important to guest room attendants who clean hotel rooms, cooks who make gourmet food, and the tip-earning servers who deliver cocktails and unparalleled hospitality."
The union noted on Sunday that Harris had also pledged at the rally to "raise the minimum wage across the country."
The Nevada Current reported on Monday that the union and other advocates for economic justice, including U.S. Rep. Steven Horsford (D-Nev.), "hope to capitalize on a popular proposal to eliminating taxes on tips to push for a federal ban on letting employers pay tipped workers subminimum wages."
Horsford told the outlet that he is working with other House members to draft a bill that would end the federal subminimum wage, which is $2.13 per hour for tipped workers.
"Some of these employers are trying to keep workers at poverty wages," he told the Current. "We need to break that. We need to break this idea that people can work for less than a fair minimum wage and for me that's a livable wage."
Supporting such legislation, said Jayaraman, "is where the Harris-Walz campaign can make their mark—and make a real, meaningful difference in the lives of tipped workers."
"Focusing on tax relief distracts from the real solution: the need to end the subminimum wage, which is a direct legacy of slavery and contributes to the worst sexual harassment of any industry in America," said Jayaraman. "The Harris-Walz campaign should be calling for all workers to be paid a livable minimum wage with tips on top."
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Workers Reject Trump 'Pandering' on Tipped Wages—But Have Message for Democrats Too
"Every poll has the cost of living, economy, and jobs with living wages as the top issues," said one campaigner. "And... the response we're getting is, 'Well, the economy is great.'"
Jun 10, 2024
A leading labor advocate on Monday dismissed former U.S. President Donald Trump's pledge to eliminate taxes on tips as "pandering" to working people and said the promise doesn't address the fact that low-wage workers need a living base wage to afford necessities—but warned that the Republican's comments reveal a shortcoming in the Democratic Party's economic justice record.
As Saru Jayaraman, president of One Fair Wage, told Common Dreams, Trump's pledge at a rally in Nevada on Sunday should be seen as "a call to Democrats who have yet to come out at any level, calling for what workers really do need this year: a living wage."
In Las Vegas on Sunday, the presumptive Republican presidential nominee told a crowd that the "first thing" he would do if elected to a second term would be ending taxation on tips, which the Internal Revenue Service (IRS) currently taxes as part of workers' regular income.
"For those hotel workers and people that get tips, you're going to be very happy," said Trump. "Because when I get to office, we are going to not charge taxes on tips... It's been a point of contention for years and years and years."
Jayaraman said that while workers complain about taxed tips to her organization—which includes nearly 300,000 restaurant and service workers and advocates to end all subminimum wages in the U.S.—eliminating those taxes would not address the current affordability crisis, which has been reflected in numerous polls that have shown the top concerns among voters to be the cost of housing and other essentials.
"The restaurant industry has used tips for 150 years in place of what people need, which is a stable, base living wage with tips on top," Jayaraman told Common Dreams. "It is helpful, for sure, to not have your taxes tipped, but that is a red herring. That should be on top of what workers really need."
"It is helpful, for sure, to not have your taxes tipped, but that is a red herring. That should be on top of what workers really need."
Jayaraman pointed out that the Republican Party does not "even believe in a minimum wage, let alone a livable wage."
Dean Baker, senior economist of the Center for Economic and Policy Research (CEPR), suggested working-class voters should not be fooled by Trump's unserious comments.
"I realize that Trump doesn't believe in thinking, but exempting tips from taxes will just encourage more employers to expect workers to get more of their pay in tips," Baker said. "This is horrible for workers, since they need a regular paycheck. They shouldn't have to depend on customers feeling generous. But I'm sure this is too complicated for Donald Trump."
In Nevada, Trump's comments did not sway the Culinary Workers Union Local 226 and Bartenders Union Local 165 , which represents 60,000 workers in the battleground state, toward the former president, who was convicted on 34 felony counts of falsifying business records on May 30.
"Relief is definitely needed for tip earners, but Nevada workers are smart enough to know the difference between real solutions and wild campaign promises from a convicted felon," said Ted Pappageorge, secretary-treasurer for the culinary workers' union, in a statement.
Despite what critics recognized as overt "pandering" to working people on Sunday, Trump's campaign has repeatedly emphasized how his tax policy plan, if reelected, would help the wealthiest Americans and corporations.
In May, the former president told oil executives that if they help raise $1 billion for his campaign it would be a "deal" because of what they would save on taxes if he were to be reelected. Trump has promised to extend his 2017 tax cuts, which disproportionately benefited corporations and the wealthy.
President Joe Biden has said he would allow Trump's tax cuts for people earning over $400,000 per year to expire if he wins a second term. He has also called for a wealth tax on individuals with more than $100 million in assets.
On social media, Trump said after his rally on Sunday that Biden has tried "to TAX more and more of [workers'] Tips, even hiring 88,000 IRS Agents to collect!"
The increased IRS funding supported by Biden and included in the 2022 Inflation Reduction Act has actually been aimed at cracking down on wealthy tax evaders; last month the IRS said its audit rate for people earning more than $10 million per year is expected to go up 50% by 2026.
Jayaraman warned that despite Biden's efforts to introduce more fairness into the tax code, voters have not heard enough from the federal government about working people's struggles to afford essentials like groceries, housing, childcare, and transportation.
"We've not seen most federal folks run on what people really are needing," said Jayaraman. "So if you look at the polls of youth and black voters and Latinx voters, every poll has the cost of living, economy, and jobs with living wages as the top issues. And... the response we're getting is, 'Well, the economy is great. Stock market's up, GDP is up, unemployment is down. People just must not understand the economy.' And I think who's not understanding is [elected officials] who look at those polls and don't understand that what workers are talking about is not the economy, but their economy, their ability to pay for eggs and gas and housing right now."
To combat Trump's pandering, Jayaraman added, Democrats must run on "what people are prioritizing right now, which is their wages and their ability to pay for things."
Jayaraman urged Democratic lawmakers to show that they are prioritizing living wages by supporting legislation that would include raises for tipped workers in states including Ohio, Arizona, Massachusetts, and Michigan.
Elected officials "could go to these states and say, 'You can vote yourself a raise this year, and we support it,'" said Jayaraman. "'Yes, we've done some things, but we know you're struggling and... you have to reelect us to get the job done. And in the meantime, you can go vote yourself a raise this November in these states.' That should be the message."
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