Stewart Muller, the owner of Campania, a local pizza chain in Atlanta’s northern suburbs, shows sports — not political news — in his restaurants because he wants his patrons to feel comfortable.
“Everyone is welcome here, regardless of who they’re going to vote for or their political persuasion,” he said.
But when it comes to the sticky issues of politics, there are some things he’s passionate about: keeping his businesses successful and his workers happy. If President-elect Donald Trump’s economic plans can help achieve those goals, Muller will be grateful.
On the campaign trail, Trump announced a pledge to end taxes on overtime pay and proposed exempting Social Security income from taxation.
But Muller has been specifically studying a proposal to eliminate the requirement for service workers to pay taxes on their tips, which Trump and later Vice President Kamala Harris each proposed.
How the proposal would work
For service workers in Georgia, especially those in the restaurant industry, they earn a small hourly rate, about $2 or $3, and make the rest in tips from customers.
Credit: Ben Gray for the Atlanta Journal-Constitution
Credit: Ben Gray for the Atlanta Journal-Constitution
As with all economic proposals, the devil is in the details. It will be up to lawmakers to determine whether the elimination applies to personal income taxes — what you file to the Internal Revenue Service by April 15 — or payroll taxes, which is what employers withhold and earmark for Social Security and Medicare, mostly, and accounts for about 7.5% of your income.
Payroll taxes are tied to your future benefits when you retire, so the amount of wages you record earning into the system correlates to how much you can expect to receive when you retire.
All workers pay payroll taxes, which usually have a flat rate, whereas personal income tax in the U.S. is a progressive rate structure, where you pay a higher rate as you earn more money. The first $30,000 of your earnings, depending on whether you are married or unmarried, are not taxed.
Because their total compensation is already so low, most part-time tipped workers don’t pay any personal income taxes, said Alex Muresianu, a senior policy analyst with the Tax Foundation. As a result, this proposal would impact a pretty narrow subset of the workforce — about 5% or 6% of the lowest-income workers, said John Ricco, associate director of policy analysis at the Yale Budget Lab.
When Trump proposed eliminating taxes on tips back in June, “it was definitely not on anyone’s radar,” Ricco said. Former U.S. Rep. Ron Paul, R-TX, introduced a similar proposal in 2012, when he was running for president, “but it never took off in any meaningful way.”
It may have been revived as an idea to win Nevada, which has a high concentration of service workers in the leisure and hospitality industry. Trump won the state with just under 51% of the vote.
Challenges to the idea
One concern expressed by both Ricco and Steve Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute, is that certain industries that are not the intended beneficiaries, such as expensive attorneys, could use loopholes to change the way they’re compensated.
“There’s definitely some possibility for rearranging your work structure to have a higher fraction of your earnings become tax-exempt,” Ricco said, such as converting regular compensation into gratuity-based compensation.
To prevent fraud, Ricco said “it would depend on the really specific legislative language to say, here’s what the test would be for the IRS to determine who qualifies.”
Historically, the IRS has not energetically pursued taxes on tipped income, Rosenthal said. That has meant billions of dollars in cash payments to service workers escaped official notice, although much of that income likely would not be taxed anyway.
Tracking tips is easier now that so many payments are done electronically via credit cards, Venmo and online. So the IRS can identify more of the tips.
Harris’ proposal had suggested limiting the benefit to those who work in a historically tipped industry, such as salons, restaurants and hotels.
“Even if you do do that, there’s still a question of why are you helping workers in one comparatively low compensated industry but not a bunch of others? Why are you cutting taxes for waiters but not cashiers who are earning the same amount of income in total?” Ricco said. “It doesn’t seem like there’s a clear policy justification there.”
Employer concerns
While Muller is intrigued by the proposal, “the order of concern, the first and foremost is the camaraderie in the restaurant.”
Credit: Ben Gray for the Atlanta Journal-Constitution
Credit: Ben Gray for the Atlanta Journal-Constitution
He’s worried, if the elimination of taxes on tips was to go into effect, that it could put “back-of-house” workers who prepare food and clean dishes at odds with “front-of-house” workers, such as bartenders and servers.
“For half the restaurant to be employees that pay tax and the other half not, that’s what I’m trying to resolve in my mind, and quite honestly, I don’t know how to do it,” he said.
At some Campania locations, bartenders make up to $100,000 with tips. While that income could be tax-free, the pantry chef making $60,000 would receive no such benefit.
Additionally, Muller is concerned about the extra administrative responsibility he might have in order to prove his compliance as an employer.
“Restaurant owners already are subject to different rules and regulations about how they’re supposed to keep records of employees’ tips, how the employees are supposed to report tips to their employer, and how the IRS collects that information,” Ricco said.
Economic impact
Depending on how broadly or narrowly it’s defined, this policy could cost the federal government $100 billion to $250 billion over 10 years in lost revenue, Muresianu said.
Muresianu said that’s not a lot of money in the overall federal budget, but it would require a lot of work on the part of the IRS and employers for little economic benefit.
Rosenthal said there are three ways to judge tax policies: equity, efficiency and whether it will raise a lot of revenue.
“A tax exemption for tipping fails on all three,” he said.
If Trump wants to help lower-income workers, there are other ways, the economist told The Atlanta Journal-Constitution. One method would be to raise the federal minimum wage for service workers.
Ricco agrees.
“If you really want to target tipped workers, then the minimum wage would help them,” he said.
Juan Sebastian Calle, who co-owns Chicheria Mexican Kitchen in Atlanta, said his employees need more support because many have had to move up to an hour’s commute away to afford housing.
However, he sees eliminating taxes on tips as a better option to close their affordability gap, because if he paid workers higher wages, he would likely have to pass that on to the customer through higher prices.
Politicians could also expand tax credits for low-income workers.
It is not necessarily wrong to be concerned whether tipped workers are struggling, Rosenthal said. “It sounds good on its face. But there are so many better ways to help.”
Staff writer Michael E. Kanell contributed to this article.
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