Vice President Kamala Harris’ campaign released a 23-point policy platform on its website this week, and one phrase in particular is catching the restaurant world’s attention: a promise to “fight to end sub-minimum wages for tipped workers.” The policy could trigger sweeping changes across the industry if enacted, reshaping how servers are compensated and how operators run their businesses.
The tip credit allows restaurants to pay servers and bartenders a lower base wage, supplementing it with tips to meet minimum wage thresholds. Employers are required to make up the difference if total earnings fall short of that standard. Eliminating this system would mean paying tipped workers the same hourly rate as non-tipped employees.
Harris’s campaign website offers few details or reasons for this shift, listing it as part of a broader agenda to “support American innovation and workers.” Typically, though, advocates argue that the move would increase the sustainability of wages and working conditions in the service sector.
The union-backed anti-tip credit group One Fair Wage claims getting rid of the current system would reduce inequities faced by women and minority workers. It has spearheaded successful efforts to eliminate the trip credit throughout the country, including in Michigan, Chicago, and Washington, D.C. It currently is backing ballot measures and pushing legislation in around a dozen states to end the practice.
The restaurant industry is pushing back hard, citing the challenge of absorbing a significant increase in labor costs amid an already tough economic environment. Operators also argue that eliminating the tip credit could reduce overall earnings for workers.
There’s been an uptick in restaurant layoffs and closures in D.C. since the city started phasing out the tip credit last spring. Before the policy took effect, servers in the area earned an average of $24.42 per hour, according to the Department of Labor. That’s more than $7 above the current minimum wage. Many restaurants have added service fees and surcharges to offset higher base wages, but most are finding that guaranteeing a similar level of compensation just isn’t feasible, especially when they’re already dealing with razor-thin margins and more price sensitivity from inflation-weary diners.
“There’s this false narrative that people who run restaurants want to have their employees earn less money because it makes them more profitable, but the reality is that it’s in everybody’s best interest for employees to have the highest possible earning potential,” one local operator told FSR earlier this year. “Our team members are pretty upset about it … They’re terrified that people are going to start tipping less because of this very public view that they’re now making a lot more money.”
There’s plenty of data to support the notion that tips left by customers go down as base wages go up—and not in equal measure. Michael Lynn, a professor at Cornell University’s School of Hotel Administration, has raised a cautionary flag to those contemplating reducing or eliminating the tip credit. His research suggests changing the system may not increase servers’ overall incomes as much as expected and may even decrease those incomes. Other studies have found eliminating the tip credit can lead to fewer jobs and more restaurant closures.
As for reducing earning disparities by gender and race, data also suggests otherwise. The Employment Policies Institute (EPI) released a study from economists at the University of California-Irvine earlier this week. It found eliminating the tip credit hasn’t increased weekly earnings for women and minority servers. In fact, it has widened hourly wage gaps between non-white and white tipped employees.
Servers don’t seem eager to lose the tip credit either. This summer, researchers at Carnegie Mellon University asked nearly 4,000 tipped workers across eight states where the fight is playing out what they thought about the proposed change. Nearly nine out of 10 respondents (87 percent) said they believed their earnings would drop if the tip credit disappeared. Only 7 percent said they’d expect to earn more. When asked what compensation model they prefer, 90 percent ranked lower base wages but higher expected tips as their top choice. Ten percent said they favor higher base wages with lower expected tips.
“Anti-tip credit organizations like One Fair Wage have crusaded against tipping in America for years, claiming that eliminating the tip credit will reduce discrimination and inequality in the industry,” EPI’s research director, Rebekah Paxton, said in a statement. “The data shows that’s simply not true. Lawmakers should listen to workers in the industry who say they prefer to keep the tipping system instead of following proposals that have no positive impacts.”
While the industry largely opposes eliminating the tip credit, it might be more open to another proposal both Harris and former President Donald Trump support: ending taxes on tips. Many industry advocates and business leaders see it as a way to boost earnings for servers without the negative side effects of removing the tip credit.
Trump floated the proposal at a June campaign rally in Las Vegas, home of the powerful Culinary Workers’ Union. Soon after, a group of lawmakers led by Republican Senator Ted Cruz introduced a bill to eliminate federal income tax on tips. Harris expressed support for the idea during her August visit to the city.
Ending taxes on tips may not make a major difference for workers, though. Half of the country’s 2 million-plus servers earn less than $37,000 a year, according to the Bureau of Labor Statistics. Yale University’s Budget Lab reports that over a third of tipped workers didn’t owe any federal income tax last year, even before accounting for tax credits.
“This suggests that the direct effect of the bill on the workforce as it stands today—before accounting for behavioral changes—would be small,” Ernie Tedeschi, director of economics at the Yale Budget Lab, wrote in an analysis of Cruz’s current proposal. “The larger and far more uncertain effect would stem from behavioral changes incentivized by the bill, such as substitution into tipped employment and tipped income.”
Harris’ campaign has indicated she would work with Congress to draft a “no tax on tips” bill that includes an income limit and other requirements to prevent high-income earners from reaping the policy’s benefits.
