The Hidden Problem With Democrats' $25 Minimum Wage Bill

Across the country, progressive politicians continue to push for an ever-higher minimum wage. Whether it’s New York City’s Mamdani-led pursuit of $30 by ’30, L.A.’s $30 “Olympic wage” for hotel workers, or Seattle’s minimum wage for the gig economy, it’s clear that the fight to raise the minimum is only escalating. Now, congressional Democrats have waded into the debate with the introduction of the Living Wage for All Act, spearheaded by Sen. Chris Murphy (D–Conn.).

Sen. Murphy’s bill has garnered attention for seeking to increase the federal minimum wage from its current level at $7.25 per hour all the way up to a $25 per hour minimum in the coming years. (This would act as a wage floor, applying in any state that had a lower wage than the feds). But overlooked in the reporting so far is another key feature of the bill: its elimination of the tip credit for restaurant workers and other tipped employees.

The tip credit is what allows waiters and others in the hospitality industry to be paid below the statutory minimum wage on a per-hour basis, so long as their tips make up the difference. This legal structure has been a staple of the restaurant industry for over 60 years, and it often allows waiters to make far more than the minimum wage. (The national median wage for waiters is $27 per hour, according to the National Restaurant Association.)

Scrapping the tip credit could hurt both restaurants and tipped workers, especially when considering how customer behavior, tax law, and restaurant payroll decisions interact. First, phasing out the credit has the potential effect of reducing the amount that customers tip in the long term, as our culture could move away from the expectation of diners leaving voluntary gratuities.

Census Bureau research has found that when the tipped minimum wage rises, the employer-paid portion of server compensation rises, but tip income declines by a similar percentage, ultimately offsetting the increase. Tipping has become a cultural norm, which may make it a sticky habit that endures for a time, but in our era of tipping fatigue, it’s also possible diners may welcome the opportunity to ditch tips.

A second consideration is how restaurants will likely respond to the tip credit’s elimination. In our state-level “laboratories of democracy,” we already can find a clue. Kurt Huffman, a co-author of this piece, owns and operates numerous restaurants in Portland, Oregon. Oregon has prohibited a tip credit for years, which has given Huffman firsthand experience with how restaurateurs often react to the tip credit’s elimination.

Many restaurants in environments without the tip credit add mandatory service fees to checks or implement what are known as auto-gratuity policies. For instance, the restaurant may automatically tack on an 18–20 percent charge to a customer’s bill. While this “auto-grat” ensures that a tip is paid by the customer, the catch is that the tip is no longer the property of the waiter but of the restaurant. The restaurant then usually keeps a portion of that tip (often anywhere from 25–40 percent) before distributing the balance to the employee.

That distinction matters. A mandatory service charge is not a tip under IRS rules. It is employer revenue; if the restaurant later distributes some or all of it to employees, the distributed amount is treated as wages.

This can, and often does, reduce the employee’s take-home pay. If a restaurant keeps part of the mandatory service charge, as is customary, the worker may receive less than he or she would have received from a voluntary tip on the same check. The math gets worse under the new qualified-tips deduction, popularly known as “No Taxes on Tips.” Qualified voluntary tips may be deductible from federal taxable income up to $25,000, but mandatory service charges and auto-gratuities are not eligible for such treatment.

Restaurants often adopt these service charges because they are afraid to raise menu prices. That is understandable, but it misses how guests process restaurant prices. As Huffman has observed from over thirty years in the restaurant business, customers do not treat all dollars on a check the same.

There are “menu dollars” and “manners dollars.” A $20 salad plus a voluntary $4 tip does not feel like a $24 salad. The $20 is the price of the product; the $4 is a customary social payment. But a $20 salad with a mandatory 20 percent service charge collapses those categories. The restaurant has not avoided a price increase. It has moved the price increase to the bottom of the check, where it can feel like a surprise or a confiscated choice.

A final reality is that the locales that have recently moved to ax the tip credit have quickly come to regret the decision. Washington, D.C., prominently scrapped its tip credit in a 2022 ballot initiative. Under the new rules, the statutory minimum wage for waiters would rise from $5.35 per hour to the District’s full minimum wage—a seemingly clear win for servers at first blush.

But on cue, D.C. experienced a nearly 5 percent decline in full-service restaurant and bar jobs in the wake of the tip credit’s elimination. Tipped worker earnings reportedly dropped by $11.8 million, as many restaurants cut hours and waiters saw reduced tips. The results were so grim that the progressive D.C. Council voted to backtrack on the tip credit’s full elimination.

In Chicago, which abolished the tip credit in 2023, 89 percent of restaurants have raised menu prices as a result of the higher labor costs, while 79 percent have cut worker hours, according to the Illinois Restaurant Association. As a result, Chicago’s liberal city council also attempted to partially reverse course from its tip credit repeal. The effort was ultimately vetoed by Mayor Brandon Johnson.

The Living Wage for All Act purports to help workers by eliminating the tip credit. But real-world experience shows that the idea is undercooked. Higher mandated wages can look good on a pay stub while still leaving workers worse off if they lose tips, lose hours, or receive service-charge wages instead of qualified voluntary gratuities.

Policymakers should not weaken a compensation model that can deliver more after-tax dollars to workers. And restaurants that face higher wage mandates should not answer with mandatory fees that irritate customers and tax employees more heavily. The goal should be simple: Maximize the share of each guest dollar that reaches workers as after-tax take-home pay.

The best way to do that is to preserve the tip credit system and send the Living Wage for All Act back to the kitchen.

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