A Tip Credit is Better Policy Than Politics

Original Article:

  • Author: Michael Saltsman

  • Publication Date: July 2010

  • Newspaper: Minneapolis Star Tribune

  • Topics: Minimum Wage

By calling for the introduction of a tip credit for Minnesota’s tipped employees, Republican gubernatorial candidate Tom Emmer managed to prove once again that a gaffe is something you say that is both true and inappropriate.

While economic research suggests his plan could be a boon for workers, businesses and customers alike, the economic naiveté of voters has opened the door for politicians to make hay off his statement — and, potentially, to make the employment situation in Minnesota worse.

As for the first variable of the gaffe equation, Emmer’s point is undeniably true. Minnesota is one of just seven states that require employers to pay tipped employees the full state minimum wage on top of any tips they receive. At the federal level, the minimum wage is $7.25 and the minimum wage for tipped employees is $2.13; if an employee makes less than $7.25 an hour when tips are added to the $2.13 figure, their employer has to make up the difference.

It’s a simple system that keeps costs down for businesses, prices low for customers, and more employees on the payroll. But Minnesota eschews that way of doing business, allowing no tip credits for any employers. As a result, Emmer said, “Minnesota’s menu prices are comparable to California and New York,” states with far higher costs of living.

A little math will help explain why. Consider restaurants: A low-margin, high-volume business, the average restaurant only makes about five cents of profit for every dollar of revenue. Every extra dollar per hour in labor costs quickly multiplies. Let’s say a hypothetical restaurant with part-time employees averages 300 employee hours per day, 365 days a year. An extra dollar per hour translates into an additional $109,500 a year in labor costs (before you add additional payroll taxes), meaning the restaurant will have to generate an additional $2.2 million in revenue just to break even.

That isn’t chump change. Absent legislation from Congress requiring citizens to consume a fourth meal every day or the creation of a new course sandwiched between appetizer and entrée, it’s hard to figure out where that much extra money – $6,000 a day, to be exact – would come from.

Unless you’re a business owner or an economist, that is. These people will tell you that the solution is simple: Avoid the expense altogether by cutting labor costs in other ways. Restaurants that used to employ servers who took care of three tables each now have a single server waiting on four or five. As a customer, you get your food but with less attention paid when you need something extra.

The odd thing about this entire discussion is that tipped employees already make well above the minimum wage. Nationally, tipped workers report their earnings at $11.65 an hour, almost double the current minimum wage in Minnesota and 30 percent higher than the living wage for a single adult in Minneapolis-St. Paul.

Of course, these facts will do nothing to dissuade elected officials who have found an issue to demagogue and whip up populist sentiment; contestants in the DFL primary have taken turns lambasting Emmer, and one even proposed a $1.50 hour hike in the state’s minimum wage.

Emmer, meanwhile, has backtracked and proposed something even more foolish than a wage hike — a moratorium on taxing tipped income. If it’s income, it should be taxed. But if it’s income, it should also be counted.

Instead of suggesting economically illiterate plans that will do damage to an already-shaky economy, why not compromise? Introduce a tip credit but grandfather in those who are already employed so they don’t feel its effects. Or introduce a tip credit the next time the state minimum wage is hiked so businesses aren’t hit with punishing new costs yet again and jobs won’t be lost.

Completing the gaffe equation, the only reason that Emmer’s statement is “inappropriate” is that he introduced an economically sound argument without explaining the economics of the issue to the public beforehand. He shouldn’t compound that mistake now by backtracking.

Michael Saltsman is the research fellow at the Employment Policies Institute, a nonprofit research organization dedicated to studying public policy issues surrounding entry-level employment.