A waiter serves drinks outside a restaurant. (Photo by Jeenah Moon/Getty Images.)
Proposals to end taxes on tips have been gaining bipartisan support since former President Donald Trump raised the idea in June, during a rally in Las Vegas.
Vice President Kamala Harris made a similar proposal in August. And Sen. Ted Cruz, R-Texas, has filed a bill that would eliminate federal taxes on tips, while Ohio Rep. Jay Edwards, R-Nelsonville, has filed one that would exempt tips from state income taxes.
But as the tip-tax-exemption train gathers steam, many Ohio economists are saying that it will benefit many tipped workers, but it won’t do nearly as much to pull them out of poverty as raising the state’s tipped minimum wage up to par with the general minimum wage.
A survey of a panel of Ohio economists conducted by Scioto Analysis and released Tuesday found that 11 of 16 economists agreed that a tip exemption would “significantly improve wellbeing for tipped workers.” But in the same survey, 11 of the 16 said increasing their minimum wage would do more to pull the tipped workforce out of poverty.
The reasoning seems to parallel arguments that many income-tax-cut schemes don’t provide the best benefits to low-income populations — the poor don’t have much income to tax.
A tax cut sounds great, but with the average Ohio server earning only $34,000 and the state income tax applying only to income above $26,000, a great many of the state’s tipped employees aren’t paying taxes that they can be exempted from, Rob Moore of Scioto Analysis wrote in a recent column.
Meanwhile, raising the minimum wage for tipped workers — $5.25 an hour — to the general minimum wage — $10.45 — would benefit all those workers.
In the comments section of the survey, Bob Gitter of Ohio Wesleyan University said that the benefits of exempting tips from income tax would primarily accrue to servers working in expensive bars and restaurants.
“Low-income tipped workers are not paying much, if any, income tax,” he said. “The benefits will be for higher income tipped workers, e.g. servers at higher-priced restaurants.”
Meanwhile, low-wage workers would be left behind, said Curtis Reynolds of Kent State University.
“I am sympathetic to low wages of tipped workers and the very real problems of tipping (bias, low amounts), but I am not sure that this will really help at all,” he wrote. “Some tips may not be declared on taxes in the first place (so exempting them does not help) and this may just slow wage growth if employers view this as an increase in total compensation. Finally, low levels of income are currently not taxed at high levels.”
In terms of pulling tipped workers out of poverty, a “minimum-wage increase affects all tipped workers at the bottom of the pay scale whereas the tax cut would barely affect the poorest workers who pay zero income tax and the biggest benefits would go to the highest-income workers,” wrote Jonathan Andreas of Bluffton University.
But Charles Kroncke of Mount St. Joseph University said while it may be well-intentioned, raising the minimum could have a perverse effect.
“The sub minimum wage is significantly below the minimum wage,” he wrote. “If the wage for tipped workers is raised to the minimum wage, employers will hire fewer tipped employees. This will make poverty worse.”
To which Andreas made a counter argument.
“The main danger of a high minimum wage is higher unemployment, but historically, the negative effects have been very small and particularly at times like now when unemployment is very low,” he said.
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