Will Trump's ‘no tax on tips' plan help or hurt restaurants?

San Francisco Chronicle​

3 days ago

A federal proposal to eliminate income taxes on tips is dividing restaurants around the country, portending a potential boon for the industry's more than two million tipped workers but a blow for their non-tipped counterparts.
The 'no tax on tips' policy, championed by both President Donald Trump and former Vice President Kamala Harris during the 2024 presidential campaign, would give a tax break to tipped employees who earn less than $160,000 annually (which would rise with inflation). Once politically unthinkable, it is now closer than ever to reality: The House of Representatives passed last week a domestic spending bill that includes the tax provision, which would add an estimated $40 billion to the federal deficit by 2028. The Senate is set to take it up this week.
The Senate in May unanimously approved a separate No Tax on Tips Act introduced by Sen. Ted Cruz, R-Texas. Lawmakers in at least 20 states have proposed similar bills.
While servers are excited by the promise of a larger paycheck, critics fear the policy will widen an already large pay disparity between front-of-house workers, who typically augment their wages with tips, and kitchen staff, who historically don't receive them. (Only workers in customer-facing roles are legally eligible to receive tips, under the Fair Labor Standards Act.) The change would have the most devastating economic impact in states where tip pooling is illegal or less prominent, industry experts said; whereas in California, restaurants are permitted to share tips between the front- and back-of-house.
More than 500 restaurant owners and workers affiliated with the Independent Restaurant Coalition, a nonprofit advocacy group founded during the COVID-19 pandemic, voiced their concerns in a letter to Congress on Friday.
'As written, the 'No Tax on Tips' provision would leave behind dishwashers, chefs, porters, and other workers who will still be taxed on their wages. The proposed tax exemption for tips will ultimately do more harm than good to the over 11 million people who rely on restaurants and bars for their livelihood — and at a time when they can least afford it,' the letter reads.
Erika Polmar, executive director of the Independent Restaurant Coalition, said the policy was created without any input from the food industry. She worries it will make hiring and retaining kitchen workers harder.
The National Restaurant Association, a major lobbying group that's worked to suppress minimum wages for workers, backs the legislation. 'Eliminating taxes on tips would put cash back in the pocket of a significant number of workers in the restaurant and food service industry and could help restaurant operators recruit industry workforce,' Sean Kennedy, executive vice president of public affairs for the association, said in a January statement.
Sophie Kelly, a server at Friends & Family in Oakland who earns almost half of her wages from tips, would welcome the tax break. On a recent paycheck, she paid $84 in federal income tax. But it's not a permanent change. As proposed, No Tax on Tips would expire in 2028. For Kelly, it feels like when the government issued stimulus checks during the pandemic: 'This is great, but it's not a long term solution.'
The three-year timeline will make it difficult for operators to plan ahead, Cheetie Kumar, a restaurant owner in North Carolina and vice president of the Independent Restaurant Coalition board, said during an online meeting the organization hosted Friday. 'In three years we're going to have a compounded, simultaneous breakdown of a labor model that we're going to get used to,' she said. 'That creates a lot of insecurity in our future.'
Despite the possible upsides for front-of-house employees, not all of them feel good about the policy. To Alex Lauritzen, who's worked in restaurants for a decade and is currently a server at Bar Gemini in San Francisco, the proposal feels more like a 'Trojan horse' than a genuine effort to support workers.
'I would rather pay my taxes and see reliable public transportation with longer service hours, affordable cities, affordable housing, access to healthcare for all, a living wage, immigration support — all things that would actually benefit workers more than politically charging tipped incomes once again,' Lauritzen said.
Some owners, too, feel conflicted about a proposal that would benefit some but not all restaurant workers across the country. At Daytrip Counter in Oakland, for example, all employees are part of a tip pool, so everyone would see a 'notable difference' in their take-home pay, said co-owner Stella Dennig. But in states where tip pooling is illegal, servers would get a major tax break; cooks and dishwashers wouldn't; and owners would be faced with the 'impossible' task of closing that income gap, she said.
'It's hard for me to be like, it's going to be great for us in California when it has the potential to really shift the landscape in places that don't tip pool,' said Dennig, who doesn't support the bill. 'Restaurants can't come back from that. They won't be able to survive that.'
Critics also fear the policy could end up harming workers by giving employers a 'justification' to deny wage increases, the nonpartisan Economic Policy Institute recently argued. One Fair Wage, a national restaurant labor advocacy group, found that nearly two thirds of tipped workers would not benefit from the federal proposal because they or their household do not earn enough money to pay income taxes.
'The overwhelming majority of tipped workers in California and America work in very casual restaurants where tips are meager,' said One Fair Wage president Saru Jayaraman. 'The tax cut is really a red herring and a way to pander to this population while simultaneously destroying their ability to survive.' One Fair Wage has instead lobbied for raising the country's subminimum wage for tipped workers, which is capped at $2.13 an hour.
The no tax on tips policy is exacerbating ongoing debate in the food industry over gratuity. Since the pandemic, more restaurants have replaced tips with automatic service charges to sustain more equitable wages for all employees. The current tax proposal 'rewards tips,' Idaho restaurant owner George Skandalos said in the Independent Restaurant Coalition's meeting. 'It basically tells us: If you're trying to pay everyone equitably, too bad. You're on your own.''
The Independent Restaurant Coalition is lobbying Congress to amend the provision to include service charges that are used expressly for employee compensation.
Dennig, whose previous restaurant used a 20% service charge, said the tax policy 'could threaten the future of service charges in our state because take home pay does have the potential to be notably higher now with tips rather than a service charge.'
Back-of-house workers at Friends & Family in Oakland are included in the tip pool, receiving a percentage based on food but not drink sales, Kelly said.
'We're trending towards back-of-house as being seen as just as important as front-of-house when it comes to tips,' she said. 'That culture is changing, which I think is a positive.'
In many cities across the country, the service charge has become a lightning rod. Some servers, while supportive of kitchen workers earning higher pay, have pushed back against a policy that means their paychecks are smaller. Controversial legislation to ban 'junk fees' in California last year was ultimately rolled back but exposed just how much diners dislike surcharges. Polmar of the Independent Restaurant Coalition has seen some public reaction to No Tax on Tips from disgruntled customers saying, ''I'm not going to tip anymore. Why should you receive this tax deduction? '
'I think it's going to create some strife,' she said.