What no federal tax on tips would mean for Minnesota service workers

Uncle Sam no longer wants taxes from tips left for bartenders or hairstylists.

That was the campaign message last fall from President Donald Trump and then-Vice President Kamala Harris, and this week it came closer to reality as both chambers of Congress took steps to remove federal taxes on tipped income.

It’s economic stimulus from the bottom up, say supporters: a win for the truck stop server and the hotel valet.

But as the dust clears, the working-class boost, tucked into a massive budget bill, looks more complicated.

“It sounds good on paper,” said David Horn, director of the University of Minnesota’s business taxation program, part of the Carlson School of Management. “But you’re prioritizing one wage over the other.”

So far, service industry workers aren‘t complaining.

Charleigh Wolf, an employee at downtown Minneapolis’ First Avenue rock club, said everyone they know is struggling financially.

“People do depend on their tips for paying rent and stuff like that,” said Wolf, 24, who bounces between the First Avenue family of venues, including Turf Club and Fine Line. “It’s not just extra money.”

Depending on the night and shift, Wolf earns anywhere from $6 in tips to about $250 on the busiest nights on top of a $15.97 hourly wage.

Yet, the devil is in the details. About a third of tipped workers earn so little that they already don‘t pay federal taxes. The House budget bill also slashes the safety net Medicaid and Supplemental Nutrition Assistance Program (SNAP).

Sheigh Freeberg, secretary-treasurer at Unite Here, the union representing First Avenue employees, said anything that helps working people keep more of their money or earn more money “is a good thing.”

“What we don‘t want to see is money just being cut from the budget, and, like, Medicaid,” Freeberg said.

According to the Joint Tax Committee, over two-thirds of the budget bill’s tax cuts would benefit those earning in the top 20% of incomes.

Besides cutting the tax on tips, the bill also includes the extension of the child tax credit, a longtime priority for Democrats and considered a win for the working class. There’s also a tax exemption for overtime wages.

The tax exemption on tips is effectively capped at people making less than $160,000.

The cuts in the SNAP and Medicaid programs have made the bill a non-starter for Democrats. On Thursday morning, after a night of debate, Republicans in the House of Representatives passed the bill on a 215-214 vote. Two days earlier, the U.S. Senate unanimously passed its bill that included the tax exemption for tipped workers.

There could be wrinkles if and when the exemption rolls out in Minnesota. The state’s budget office says state taxes remain on tips.

And while restaurant owners may push more workers toward tipped income, Minnesota is a non-tip-credit state, meaning servers must make minimum wage. Moreover, the state generally bans mandatory “pool tipping.”

In 2018, for instance, Surly Brewing paid a $2.5 million settlement with more than 100 workers related to violating Minnesota’s stricture against mandatory tip-pooling.

“People think it’s going to help workers,” said Joel Andersen, an attorney with Nilan Johnson Lewis who has represented restaurants. “But a change in the tax law that would incentivize compensation to be paid through tips may result in Minnesota employees pushing compensation into tip pools.”

Dennis Monroe, a tax attorney and longtime owner of restaurants in the Twin Cities, including Minneapolis’ EaTo, doubts the bill will have a dramatic impact on the service industry.

“I don‘t think it’s going to change the wages at all,” Monroe said. “You have to create a culture in a restaurant.”

Monroe said servers stop by his restaurants every week seeking employment somewhere that offers additional benefits and incentives, such as profit-sharing. Many higher-end restaurants in the Twin Cities, he said, have experimented with doing away with gratuity in favor of higher base wages.

“We’ve all tried over the years to go to a higher wage and not have tips, but that hasn‘t worked well in Minnesota at all.”

But many tipped income workers, whether pouring drinks, delivering burgers or driving taxi cabs, are often living paycheck to paycheck. And the exemption will be welcomed.

In Eagle Lake, Minn., just east of Mankato, Rose Hanson, 62, has waited tables nearly half her life at the Eagle’s Nest.

“I don‘t think they should have ever put taxes on tips,” Hanson said.

She hopes the exemption will be straightforward.

Matt Woitas, 33, who mostly works the back of the house at Eagle’s Nest, said he depends on tips. He also suspects the tax exemption could come with some strings attached.

“Big corporations are going to figure out a way to ruin this for everyone,” Woitas said. “It’s not like we’re getting rich off tips.”

Jp Lawrence of the Minnesota Star Tribune contributed to this story.