Removing the federal income tax in tips would allow the 50 or so workers who rely on tips for their income employed with Montgomery-based Vintage Hospitality Group to get a nice boost in take-home pay.
“There are millions of people in the U.S. who it would stand to help,” said Nicholas Wyatt, general manager of a restaurant group that operates Ravello Ristorante, Bar Attico, and Red Bluff Bar.
But in a society experiencing tip fatigue, economists and political scientists alike are widely questioning and criticizing the rarest of bipartisan policy matters in this election season: No taxes on tips.
The experts claim there are plenty of worries to consider as politicians vow to remove a long-established income tax on tips:
Billions of dollars would be removed from the federal budget – estimates are all over the map – if the income tax on tips is removed, meaning cuts could occur elsewhere in federal spending packages.An unfairness of offering a tax break to hospitality industry workers who compose a small percentage of low-income workers in the U.S. According to the Yale Budget Lab, only 5% of workers in the bottom 25% of earners work in tipped occupations.Further complications of an already complicated federal tax code.The unintended consequences that cutting income taxes on tips would create. Economists predict that other industries will revert to tips, such as nurses and lawyers to even college professors.
With 72% of Americans saying tipping is expected in more places today than five years ago, would removing the tip create an even higher demand on tipping?
“I could see a dental office saying that we are cutting wages for the dental assistance, but if she does a good job, tip her,” said Bob Wood, a professor of finance at the University of South Alabama. “You could get all kinds of people being tipped – a university professor, after giving the grades, students could be asked if they enjoyed the course and ‘here is a link to my GoFundMe page for that.’ It could open a whole can of worms.”
Political pledges
Republican vice presidential candidate Sen. JD Vance, R-Ohio, signs the check “no tax on tips!!’ as he leaves $200 in cash for a gratuity at the Park Diner, Sunday, July 28, 2024, in Waite Park, Minn. (AP Photo/Alex Brandon)AP
Concerns about fairness, fiscal policy, and fraught consequences are mattering little on the campaign trail and in Washington, D.C., where policymakers are rolling out proposals at a time the idea is popular among Americans, garnering support from well above 70% of those who are polled.
Republican presidential nominee Donald Trump and Democratic Vice President Kamala Harris have announced, at separate times and during different events in the swing-state of Nevada, their support to eliminate the federal income tax on tips.
Some states have already floated the idea. In California, Republicans who make up the legislative minority, pitched removing the state income tax on tips. It did not gain any traction. A similar concept has been floated in Oregon.
Republican U.S. Rep. Marjorie Taylor Greene of Georgia campaigns for U.S. Rep. Barry Moore on Saturday, March 2, 2024, during a campaign stop at Steele Creek Lodge in Satsuma, Ala.John Sharp/jsharp@al.com
At least three measures have been introduced in Congress, and though none of Alabama’s congressional delegation is a co-sponsor for them, there is general support among lawmakers for the concept.
“I think no tax on tips would be fantastic for the local economy across Alabama, but particularly in places like Baldwin County where so much of the industry is tourism,” said U.S. Rep. Barry Moore, R-Enterprise. “This policy may encourage local folks to join the service industry because their earning opportunities will be increased.”
The bipartisanship also spreads to down ballot contests, including Alabama’s 2nd congressional district where Republican Caroleene Dobson and Democrat Shomari Figures are engaged in a bitter contest ahead of the Nov. 5 general election.
But both candidates recognize that removing the federal income tax on tips is good politics.
Alabama Congressional District 2 raceAL.com
“A tip is a reward for a job well done, and taxing that reward is just another example of the government punishing those who work hard and go the extra mile, especially with skyrocketing inflation,” said Dobson, who is also advocating for a removal of the federal income tax on overtime pay as well.
Said Figures, “Times are tough in America and for far too many people. This is one way among many others that we can make some positive impact on the earning capacity of some of the lowest wage earners.”
Coastal impact
Customers dance inside The Hangout, a popular restaurant in Gulf Shores, Ala., on Thursday, Aug. 12, 2021. AP
Tipped workers account for more than 5% of Nevada’s workforce, among the highest in the country. Alabama, according to one analysis, doesn’t trail far behind. And in Baldwin County, where the hospitality sector is dominant, tipped-related employees account for 12.68% of the overall workforce, or 11,752 jobs, according to the Baldwin County Economic Development Alliance.
Along the Gulf Coast, though, waiters and waitresses can earn substantial incomes during peak tourism seasons, as restaurants are filled with tourists who will contribute an 18% to 20% tip on their meals. Feeding a family of four or five, at a cost of $150 to $200 or more, can add up to a substantial income derived in tips.
Wyatt, though, said even at fine dining establishments, there are “more individuals” included into a tip pool who will receive a portion of the tip from a $300 or more meal.
“That goes to the host, the support staff, the food runners and waiter assistance,” Wyatt said. “By and large, they are getting more written down on their tip line, but they are also having to speak the love.”
David Clark, president & CEO with Visit Mobile, said the push represents the first time he’s ever heard any politician discuss removing the tax on tips during his 37-year career in the hospitality sector.
Clark said he sees promise in the policy for coastal Alabama, saying that it could go a long way in resolving a shortage of about 7,000 tourism workers in the region.
“A higher wage and higher income equals better recruiting, better retention and better careers and opportunities,” Clark said. “In the hospitality industry, there is kind of a misconception that you have to wait tables and clean rooms and that kind of thing. But we do that, and those things equate into careers. Those frontline level jobs turn into great careers and high-paying jobs down the road.”
Clark said at some larger resorts, bartenders can earn $80,000 a year with tips.
“In Gulf Shores and Orange Beach, we see about 8 million visitors each year who spend $9 billion, and we (in Mobile) see about $3.5 billion,” Clark said. “We’re 40 percent of the state’s total tourism in these two counties. Obviously, with more disposable income, it should greatly enhance the economy.”
State concerns
Not every organization in the coastal area is convinced that removing the tax is the best policy.
Donna Watts, CEO with the South Baldwin Chamber, said that while businesses that employ tipped workers believe that removing the tax will attract more people to the hospitality sector, others are concerned that other employment sectors – namely, retail – will suffer.
“Some business owners have raised concerns about the broader economic implications,” Watts said. “They worry that eliminating taxes on tips could result in a shortfall in state revenue, which may lead to increases in other taxes to offset the loss.”
State Sen. Arthur Orr, R-Decatur, chair of the committee that oversees the state’s education budget, said if federal officials decide to remove the federal income tax on tips, he suspects Alabama lawmakers would follow suit with removing the state income tax.
“Generally, we follow the federal income tax laws,” Orr said. “My thought is that we would probably follow suit if legislation is passed at the federal level exempting tips. But we’d want to know the fiscal costs.”
He said it’s hard to estimate how much that might be. A hit of around $12 million would be “manageable,” Orr said. But if the loss climbs to $150 million or so, “that’s a different story.”
Rooted system
Alabama is among the 15 states that charge the same as the federal subminimum wage for tipped employees at $2.13 an hour. The minimum wage is allowed as long as the worker receives enough tips to bring their salaries up to the full minimum wage of $7.25 an hour.
As a result, employers of tipped workers can rely on customers to pay $5.12 per hour. That amounts to roughly 70% of a business’ wage obligation to tipped staff.
Southern states, in fact, comprise some of the highest percentages of tipped workers. According to an Economic Policy Institute report earlier this year, tipped workers in the South are paid the second lowest median wage of any region. Hispanic workers in the South are also overrepresented in tipped work.
According to research by Nina Mast, a policy and economic analyst with the Economic Policy Institute, the subminimum wage in the U.S. is rooted in the exploitation of formerly enslaved Black workers and dates to the Civil War. Though tipping was eliminated in Europe, it grew in popularity in the U.S. and as racial hostilities and discrimination allowed employers to codify the practice.
In the modern era, a majority of states have some sort of subminimum wage for tip workers. At least seven states have done away with the tip tax credit system, meaning that workers get paid the full minimum wage plus tips.
Mast argues that reliance on customers to pay the bulk of tipped workers’ wages exposes them to income instability and the potential of wage theft – she notes that it’s often left to the workers to track their own hours and tips and confront their employer if something seems incorrect.
But upending the system could be politically impossible, according to Joe Cordes, professor of economics, public policy, and public administration & international affairs at George Washington University.
“It’s not something a president can simply make happen by executive order,” Cordes said. “It would first need to be reviewed by a House Ways and Means Committee, the tax-writing committee in the House. It would go through the normal procedures that apply to any change to the Internal Revenue Code. It would need to be voted out of the House, and then reviewed and voted on by the Senate Finance Committee. And assuming that the House and Senate agreed that tips in some form ought to be exempt from taxation, they need to go to the president for signature.”
He added, “I personally have my doubts it’s something that will become law.”
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Publish date : 2024-09-05 01:30:00
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