How to steal $110 million from Iowa workers

No artifice of “regulatory relief” or concern for untipped workers can justify this theft.

In most states, tipped workers are paid a subminimum “tipped wage.” In Iowa the tipped wage is $4.35/hr. The gap between the tipped wage and the minimum wage (in Iowa, $7.25-$4.35 or $2.90) is called the “tip credit.” Tips are first used to satisfy this credit (bringing the hourly wage to the minimum); once the credit is satisfied, tips are an uneven addition.

Our state and national labor laws have long operated under the assumption that tips earned by waitresses or bartenders or manicurists belong to the worker who earned them. In 2011, the federal Department of Labor (DOL) clarified and codified this rule, underscoring that, regardless of the jurisdiction or local wage, “a tip is the sole property of the tipped employee.”

In December of last year, the Trump Administration announced its attention to repeal this rule (after already announcing its intention to cease enforcement of the rule last July). Under the new regime, employers of tipped workers could retain any tips in excess of those needed to satisfy the tip credit. Forcing tipped workers to pool or kick back tips to the house has always been considered a form of wage theft. The new rule would make this wage theft perfectly legal.

The new rule, the brainchild of the National Restaurant Association, rests on the thin logic that employers would share tips with “back of the house” staff. But nothing in the rule requires them to do so, and research on wage theft in various jurisdictions suggests that tip stealing by management is already widespread. Indeed, the DOL punctured its own logic with an internal study finding that the rule would result in huge losses to tipped staff, and then — in defiance of any semblance of good government and transparency — buried the study.

Fortunately, the Economic Policy Institute (whose crack research staff includes the DOL’s former chief economist) has stepped in with its own look at the dismal impact of this rule. Using a combination of W-2 (tax) and industry data, EPI estimates a base of about $36.4 billion annually in tips (a conservative estimate, since a substantial share of tips go unreported as income). Since some of that $36 billion must be used to satisfy the tip credit, the share of that “at risk” is a little lower, about $26 billion.

Grade school economics, in turn, would suggest that almost all of that $26 billion would be pocketed by employers: There is no need or incentive, after all, to share tip revenues with bussers and dishwashers, whose wages (and willingness to work) are already established by local labor markets. Fortunately, many state labor laws offer further protection or regulations of tipped wages that would not be affected or pre-empted by the new federal rule. This brings the take of this heist down to just under $6 billion. In Iowa alone (where no state laws supplement federal rules and standards on tipped work), the annual loss would be about $110 million.

Looking at this on a smaller scale drives home the avarice and the injustice. Consider Francesca, a waitress at a mid-price, full service restaurant. Her base wage is $4.35. On a typical four-hour dinner shift, she serves eight tables. The average bill for those tables is $25.00, and the average tip is 15 percent or $3.75 — making her take home pay $47.40 ($17.40 in base wages and $30 in tips), or just under $12/hour. Under the new rule, Francesca would keep only enough of that $30 in tips to bring her wage — the base wage plus the tip credit — to the federal and Iowa minimum wage of $7.25. She takes home $29. If we follow EPI’s assumption, about half of the remaining tips would go to other employees, and about half would go in the employer’s pocket.

No artifice of “regulatory relief” or concern for untipped workers can justify this theft. The new rule, as Christine Owens of the National Employment Law Project notes, is “nothing more than robber barons masquerading as Robin Hood.”

Colin Gordon, professor of history at the University of Iowa, is senior research consultant at the nonpartisan Iowa Policy Project. He has authored or co-authored many IPP reports on jobs, wages and wage theft issues including The State of Working Iowa. cgordonipp@gmail.com

More from IPP on wage theft:
Wage Theft in Iowa by Colin Gordon, Matthew Glasson, Jennifer Sherer and Robin Clark-Bennett, August 2012
Stolen Chances: Low-Wage Work and Wage Theft in Iowa by Colin Gordon, September 2015

Cliff ahead: Learn from Kansas

Despite chronic revenue shortfalls that have forced a series of mid-year budget cuts, senators are moving a tax-cut bill forward without even an analysis of its impact.

The Iowa Senate is poised to move a massive tax cut bill out of committee today, in the belief that somehow what was a disaster in Kansas will be a big success in Iowa.

Despite chronic revenue shortfalls that have forced a series of mid-year budget cuts over the past two years, and the prospect of a tight budget for next year, Senate Republicans propose to cut $1 billion a year from the state budget. They are moving the bill forward without even an analysis of its impact.

Proponents claim this will make Iowa more competitive and boost the economy. There are two problems with this claim. First, two major accounting firms that rank states on their level of business taxation continue to put Iowa right in the middle of the pack, or even better. We are already competitive. Ernst & Young (below) ranks Iowa 29th, while Anderson Economic Group’s measure ranks Iowa 28th — in both cases, showing little difference across a broad middle range of the scale.

Second, there is good reason to expect the bill to have negative effects on the economy, not positive. When Kansas enacted major cuts to state income taxes in 2012 and 2013, the Governor and his friends at ALEC (the American Legislative Exchange Council) lauded this experiment — which five years later has proven to be a dramatic failure.

Abundant evidence shows the tax cuts failed to boost the Kansas economy. In the years since the tax cuts took effect Kansas has lagged most other states in the region and the country as a whole in terms of job growth, GDP growth, and new business formation.

When confronted with the Kansas failure, the bill’s proponents respond that the only problem in Kansas was that they failed to cut services sufficiently to balance their budget. But here’s the problem: Their constituents were up in arms over the cuts they did enact; they would not have stood for anything more drastic.

In order to bring the budget somewhat back in balance, Kansas borrowed from the future, using up reserves, postponing infrastructure projects, and missing contributions to the pension fund. Schools closed weeks early when state funding ran out. Had they cut spending further, that would have put a bigger dent in the economy, as recipients of government contracts were forced to retrench and workers laid off spent less in the local economy.

A supermajority of the Kansas Legislature voted to end the experiment last year, recognizing it as a failure and responding to the demands of Kansas citizens to restore funding to education, highways, and other state services they rely on. That decision no doubt saved the state economy from performing even worse in the years to come.

The Senate bill would harm Iowa in much the same way. Education accounts for over half of the state budget. Tax cuts of this magnitude would have very serious consequences for our public schools, and would force tuition up drastically at community colleges and regents institutions. Our court system would be forced into further personnel cuts, meaning long delays for those seeking justice. We would see more children suffer as family service workers face ever higher caseloads.

Proponents claim the Senate plan is “bold.” So is jumping off a cliff.

Peter Fisher is research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org

 

Related from Peter Fisher:

The Lessons of Kansas

The Problem with Tax Cutting as Economic Policy

SNAP decision could be backward

Clear progress in access to fresh, nutritious foods for children and the disabled in Iowa are at stake in the White House plan for SNAP.

The Trump administration has proposed a 2019 budget with deep cuts and fundamental changes in the Supplemental Nutrition Assistance Program (SNAP). Formerly known as Food Stamps, SNAP every month assures access to food for more than 350,000 Iowans and pumps more than $38 million into the state economy.[1]

The White House proposal would cut of about $213 billion from SNAP over the next decade. About 40 percent of benefits issued to SNAP recipients would be held back by the USDA. Some cuts would go to fund non-perishable food boxes. Other cuts would just reduce access to food for citizens.[2] The budget also would kick some recipients off the program.

Now adults who are not raising children or are disabled have just three-month of food aid over three years. The change raises the age for those who can get food under that provision to age 62. It was formerly 49. The younger adults would get nothing. Also the White House proposal eliminates the minimum benefit, and caps assistance to any household at six people.

These changes would have unfortunate effects on already high levels of food insecurity in Iowa.

An estimated 10.7 percent of Iowans are considered food insecure, meaning they lack consistent access to affordable, nutritious food.[3] SNAP assisted one in eight Iowans in fiscal year 2016. Of those families receiving SNAP benefits, 69 percent have children, and more than 25 percent of benefits go to households with family members who are elderly or disabled. The benefits are not overly generous. In December 2017, Iowa SNAP recipients received just $1.15 per meal.[4]

Food insecurity is correlated with obesity and chronic disease with adults[5] and poses serious threats to child development and school performance.[6] Research has shown that “every $5 in new SNAP benefits generates as much as $9 of economic activity by adults in families to receive benefits.” [7] SNAP spending contributes to local spending and cuts would hurt small grocers in rural Iowa.

Instead of an opportunity to choose nutritious food in the current debit card system, the administration would offer delivered boxes of foods such as canned meats, cereal and shelf-stable milk. The alleged savings from the change ignores the cost of delivery.

There has been clear progress in getting SNAP to provide access to fresh, nutritious foods for children and the disabled in Iowa. For instance, some Iowa communities have piloted a program called Double Up Food Bucks that doubles the value of food dollars up to $10 to purchase fresh produce at farmers markets in order to incentivize healthy eating.[8] Food boxes are a poor substitute for that kind of initiative.

The White House proposal takes Iowa backward on health and food access.

Posted by Natalie Veldhouse, research associate at the nonpartisan Iowa Policy Project. nveldhouse@iowapolicyproject.org

 

 [1] Iowa Department of Human Services, F-1 Food Assistance Program State Summary — January 2018. http://publications.iowa.gov/26363/
 [2] Center on Budget and Policy Priorities, “President’s Budget Would Cut and Radically Restructure SNAP Food Benefits,” February 2018. https://www.cbpp.org/blog/presidents-budget-would-cut-and-radically-restructure-snap-food-benefits
 [3] U.S. Department of Agriculture, “Household Food Security in the United States in 2016,” September 2017. Table 4: Prevalence of household-level food insecurity and very low food security, average 2014-2016. https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/key-statistics-graphics.aspx
 [4] Ibid, Iowa Department of Human Services.
 [5] Food Research & Action Center, “The Impact of Poverty, Food Insecurity, and Poor Nutrition on Health and Well-Being,” December 2017. http://frac.org/wp-content/uploads/hunger-health-impact-poverty-food-insecurity-health-well-being.pdf
 [6] Food Research & Action Center, “The Connections Between Food Insecurity, the Federal Nutrition Programs, and Student Behavior,” 2018. http://frac.org/wp-content/uploads/breakfast-for-behavior.pdf
 [7] U.S. Department of Agriculture, The Food Assistance National Input-Output Multiplier (FANIOM) Model and Stimulus Effects of SNAP. October 2010. https://www.ers.usda.gov/webdocs/publications/44748/7996_err103_1_.pdf?v=41056
 [8] Iowa Healthiest State Initiative, “Iowa Healthiest State Initiative Expands Double Up Food Bucks Program in Iowa,” May 2017. http://www.iowahealthieststate.com/blog/press-room/iowa-healthiest-state-initiative-expands-double-up-food-bucks-program-in-iowa/

Rest/best/worst of the story

redink-capitol

Senator Joni Ernst is using Facebook to gin up support for the new tax bill. It is a one-sided picture, to say the least.

So, what does it really mean for Iowans that the tax bill is law?

  • Middle and low-income Iowans will see temporary ​tax cuts in the short term that are ​drastically smaller​​ than those high-income taxpayers will see — and these will be taken away or turned into tax increases by 2027 to help pay for permanent tax cuts for corporations.
  • Millions of people nationwide will lose health insurance coverage as elimination of the individual mandate drives up costs for all.
  • The wealthy will keep more millions of dollars that have never been taxed due to further exemptions in the estate tax.
  • The Child Tax Credit will be extended to affluent families who do not need assistance, while 86,000 children in working families in Iowa receive a token increase of $75 or less — both expansions to evaporate after 2025.
  • Businesses will get enormous, permanent tax breaks with no requirements to create jobs.

Some might recall a longtime radio commentator, Paul Harvey, and his “Rest of the Story” pieces. The points above are the “rest of the story” that you might not hear from backers of the latest tax giveaway in Congress. You might be OK with them and call them the “best of the story.”

Or, you might be concerned about the impact they will have on U.S. and Iowa families, on national debt and new challenges they bring to the safety net, and call them the “worst of the story.”

But they are the real story, and they should not be forgotten as the spin continues.

2017-owen5464Mike Owen is executive director of the nonpartisan Iowa Policy Project in Iowa City. mikeowen@iowapolicyproject.org

Careful backpedaling on estate tax, Senator

Contrast Senator Grassley’s current statements with his 2005 thought that “it’s a little unseemly” to suggest repealing the estate tax “at a time when people are suffering.” The tax bill promises suffering.

One of the problems with backpedaling is if you don’t do it well, you trip. Somebody catch Senator Chuck Grassley.

As has been widely noted across social media — a good example is this post in Bleeding Heartland — The Des Moines Register quoted Iowa’s senior senator that estate tax repeal would reward “people that are investing, as opposed to those that are just spending every darn penny they have, whether it’s on booze or women or movies.

Ironically, while promoted as a pullout quote in the packaging of the story, the “booze or women or movies” comment came quite low in the piece. More substantive problems with the Senator’s rationale for opposing the estate tax were presented higher: specifically his continued insistence that this has something to do with the survival of family farms.

It. Does. Not.

10-30-17tax-factsheet-f1Senator Grassley has promoted this unsupportable justification for his position for many years. This New York Times piece from 2001 includes it.

And he renewed it again Monday in claiming his “booze or women or movies” comment was out of context, taking the opportunity to promote his spin again — and again getting wrong the facts behind his fundamental objection: the impact on farms.

There, he claimed in the story that he wants a tax code as fair for “family farmers who have to break up their operations to pay the IRS following the death of a loved one as it is for parents saving for their children’s college education or working families investing and saving for their retirement.”

While only a handful might actually have to pay any tax at all because of the generous exemptions in the estate tax — shielding $11 million per couple’s estate from any tax — no one in the many years the Senator has pretended this is an issue has been able to cite a single farm that had to break up because of the tax.

Contrast his current statements with the one he made in the wake of Hurricane Katrina in 2005, when there was a move afoot to slash the estate tax. And — as shown by the graphs below — even fewer estates in Iowa and the nation are affected by the estate tax now than at that time, when he said “it’s a little unseemly to be talking about doing away with or enhancing the estate tax at a time when people are suffering.”

The tax legislation in Congress will cause millions to suffer, directly through a loss of health insurance, some with actual tax increases even at middle incomes, and over time with a loss of critical services that help low- and moderate-income families just to get by.

Furthermore, any middle-income tax cuts expire in 2026 while high-income benefits and corporate breaks remain in effect. And then, even more will suffer.

Questions we have been asking for years remain relevant today, and each time pandering politicians take a whack at the estate tax:

  • Is it a greater priority to absolve those beneficiaries of the need to contribute to public services — and make everyone else in the United States borrow billions more from overseas to pay for it — or to establish reasonable rules once and for all to assure the very wealthiest in the nation pay taxes?
  • Do we pass on millions tax-free to the heirs of American aristocracy, or do we pass on billions or trillions of debt to America’s teen-agers?

We all shall inherit the public policy now in Congress. As long as the estate tax exists, it remains the last bastion assuring that at least a small share of otherwise untaxed wealth for the rich contributes to the common good, or at least toward paying the debt they leave us. Fear not for their survivors; they still will prosper handsomely.

2017-owen5464Mike Owen is executive director of the Iowa Policy Project, a nonpartisan public policy research organization in Iowa City. Contact: mikeowen@iowapolicyproject.org

Editor’s Note: This post was updated Dec. 6 with the graphs showing the decline in Iowa estates affected by the estate tax.

What happened to infrastructure plans?

Already, federal help to improve drinking water and wastewater systems has been on the decline. How much appetite will there be for necessary construction when taxes to pay for it are being cut?

At the beginning of this year there was talk of possible bipartisan legislation to repair America’s crumbling infrastructure.

Both candidates for president had promised a new emphasis on repairing the nation’s roads, rails, sewage treatment plants and airports. The number kicked around during the campaign was often $500 billion. After President Trump won, he pushed up the rhetoric and spoke of a $1 trillion plan.

If Congress passes the tax bill now being considered, there will be little room in the budget to pay for present services, as we have emphasized here at IPP. How can this nation also invest in the things that will certainly produce jobs and make the nation more competitive?

The chances for implementing an ambitious infrastructure spending plan seem remote, as Congress is on course to add $1.4 trillion or even more in deficit spending over the next 10 years.

Already, federal help to improve drinking water and wastewater systems has been on the decline. How much appetite will there be spend more on what most agree is necessary construction when taxes to pay for those expenditures decrease so drastically?

When there is no appetite for spending, state governments sometimes resort to tax credits. That seems unwieldy in this case and, in the next few weeks, tax credits will lose much of their value anyway. When taxes are lower, there is less to gain by giving credits.

The new tax cut will give a benefit just for being a corporation or for being wealthy. Why invest in something productive when you are given a reward simply for “being?”

David Osterberg co-founded the nonpartisan Iowa Policy Project and remains its lead environment and energy researcher. dosterberg@iowapolicyproject.org

Beware corporate tax con job

Those who want us to believe in the magic of trickle-down economics are trying the oldest tactic in the books: misdirection.

EDITOR’S NOTE: A version of this piece appeared in the Wednesday, Nov. 29, 2017, Cedar Rapids Gazette. Online version here.

Those pushing the tax bill now before Congress have a tough job. They have to convince ordinary taxpayers that they should embrace a bill that gives massive tax cuts to corporations and rich people, raises the national debt, results in millions losing health care, and sets the stage for huge cuts in programs, from Medicare to food assistance to education.

Their principal argument — that trickle-down economics is going to bestow jobs and wages on the middle class — is a con job.

Why do U.S. corporations need a tax cut when they are already paying taxes at a lower overall effective rate than in other advanced economies? They don’t.

You have probably heard just the opposite: that our rates are the highest in the world, a skewed view that ignores only the nominal tax rate is higher than most other countries. In fact, a myriad of deductions and loopholes brings the actual rate corporations pay way down, to below average.[1]

The huge deficits created by this tax bill — $1.5 trillion over 10 years — would push interest rates up and would choke off investment, counteracting any tendency of the corporate tax cuts to increase investment. Furthermore, an examination of developed economies across the globe shows that corporate tax cuts over the past 15 years have not produced growth in capital investment. [2]

Nor is a cut in corporate tax rates going to lead to wage increases. U.S. corporate tax rates were slashed in the late 1980s, and in the years since we have seen the historic link between productivity and wages broken. In other words, the last corporate tax cut ushered in a period of stagnant wages, even though productivity continued to rise.

Think of it this way: Why would we expect tax cuts now would lead to corporations sharing productivity growth with workers through higher wages? It hasn’t been happening for the past 30 years.

It gets worse. The bill is supposed to be only $1.5 trillion because there are other tax increases that hold down the total. However one of those offsets won’t work as planned. A minimum tax on overseas profits, which sounds like a good idea, will actually provide an incentive for multinational companies to move American jobs overseas in order to escape the new tax.

Those who want us to believe in the magic of trickle-down economics are trying the oldest tactic in the books: misdirection. Focus on this shiny bauble — a small cut in your taxes in the short run — and this pie-in-the sky promise of jobs and higher wages; pay no attention to the billions of dollars going to corporations and the rich, and the inevitable cuts in programs, from health care to education to Medicare.

Peter Fisher is research director of the nonpartisan Iowa Policy Project in Iowa City. pfisher@iowapolicyproject.org

 

[1] U.S. corporation income taxes amount to 2.2 percent of GDP, while other advanced economies (the remaining countries in the Organization for Economic Cooperation and Development) collect 2.9 percent of GDP in corporate taxes. See “Common Tax ‘Reform’ Questions, Answered.” Josh Bivens and Hunter Blair, Economic Policy Institute, October 3, 2017.

[2] Josh Bivens, “International Evidence Shows that Low Corporate Tax Rates are not Strongly Associated with Stronger Investment.” Working Economics Blog, Economic Policy Institute, October 26, 2017.