This week, the Maryland Senate Finance Committee heard public testimony regarding SB 803, which would eliminate Maryland’s tip credit and raise the hourly base wage for tipped restaurant workers by over 300 percent. The hearing was filled with current restaurant employees and restaurant owners who explained how the bill would hurt their tips and their jobs.
EPI’s Director of Research Rebekah Paxton also testified in opposition to the bill, providing some additional economic research context for the experiences and concerns voiced by employees.
Read the full testimony below:
Good afternoon members of the Senate Finance Committee, and thank you for the opportunity to speak today. My name is Rebekah Paxton, I serve as the Director of Research at the Employment Policies Institute.
SB803 is a bad economic deal for Maryland’s tipped workers. States that have eliminated their tip credits have left tipped restaurant employees worse off than states that allow them.
First, Three out of four economists agree that eliminating tip credits results in lost jobs for restaurant servers and bartenders.
In fact, a UC-Irvine study on state tipped wages across the country estimates that every 1 dollar increase in the tipped wage cuts jobs by roughly 6 percent.
Miami and Trinity University economists estimate this proposal could cost 7,200 servers and bartenders their jobs.
Second, eliminating tip credits costs tipped employees their hard-earned income. Proponents of this bill argue eliminating Maryland’s tip credit will provide a flat minimum wage with “tips on top,” but the economic reality couldn’t be more different.
A Cornell University study analyzing state tipped minimum wages found that as the tipped wage increases, customers’ tip percentages decline in full-service restaurants.
As a result, UC-Irvine finds every $1 increase in the tipped minimum wage causes a 6 percent decline in overall earnings for these employees.
This proposed increase is estimated to cost tipped workers’ families up to $8,000 in earnings every year.
The employees here today say the system works. They are joined by employees across the country who have led the charge to defeat bills like this.
Why? They don’t want to end up like the West Coast where restaurant employees are bound to one flat wage.
A study published by Harvard University Business School estimates tipped wage hikes in no-tip credit markets such as San Francisco have increased restaurant closures: for every $1 increase in the tipped minimum wage, restaurants were 14 percent more likely to shut down.
Why has tip credit elimination had such a negative impact on the full-service restaurant industry and tipped employees?
When the tip credit is taken away, restaurants are forced to weigh potential menu price hikes, reducing staff, or switching to service charges instead of letting customers tip.
When San Francisco’s Zuni Cafe announced it would switch to a service fee instead of tipping, service staff were so concerned they reached out to reporters, with one indicating the change would cost him $30,000 a year.
This is already happening an hour away in Washington, D.C., where the tip credit will be reduced and eliminated beginning in May.
While the law isn’t even in effect yet, Reddit users have compiled a list of 140 D.C. restaurants and bars that have already begun switching to automatic service charges in anticipation of the law.