Proponents of eliminating state tip credits mislead workers and lawmakers by arguing that doing so won’t hurt their tips. New data from point-of-sale tech giant Toast tells a different story.
Seven states, as well as the District of Columbia, have enacted no-tip credit laws, meaning restaurants and bars are unable to count tip income toward the minimum wage requirement, even though tips generally far surpass the hourly minimum wage. Tipped restaurant employees, including servers and bartenders, have rallied against these efforts across the country, as the result from no tip credit policies means fewer jobs that earn tips and lower tip income.
New data suggests that statistically, states that have eliminated the state tip credit are on the low end of state average tip percentages. Restaurant sales platform Toast collects quarterly data on card or digital sales transactions in roughly 79,000 restaurant locations across the country, and recently released data from Q4 in 2022 as well as select data from 2023.
California, the state with the largest required minimum wage at $15.50 per hour with no tip credit allowance, comes with the lowest average tip percentage (18.2%) in the nation in full-service restaurants. In fact, six of the seven One Flat Wage states (excluding Washington, D.C. which was not included in Toast’s report) are in the bottom half of all U.S. states having the lowest average tip percentages. The only flat wage state not in the lower half is Montana, which has the lowest effective minimum wage ($9.20 per hour in 2022, compared to effective wages of up to $15 per hour on the West Coast).
Statistically, a regression analysis of Toast tip percentage data compared with state tipped minimum wage levels finds that raising the tipped wage has a significant negative effect on the percent tip customers leave at full-service restaurants. This is not just a result of certain states being bad tippers – analysis of the effect on tips in quick-service restaurants which are less likely to employ tipped workers at a lower base wage shows that there is no significant effect of tipped minimum wage level on tipping at these restaurants.
This data adds to a growing body of economic research that indicates restaurant employees’ tips fall when tip credits are slashed or eliminated. First, although tip earnings are historically underreported, analysis of Bureau of Labor Statistics data shows that in states abiding by the federal tipped minimum wage of $2.13 per hour, tipped employees report an average of $15.51 hourly earnings.
But when lawmakers tamper with the tip credit system, evidence shows tip earnings decline. A Cornell University study analyzing tipped wages across the country found that as tipped wages rise, tip percentages decline in restaurants. Another study by the U.S. Census Bureau studying reported earnings of tipped restaurant employees found that tip income declines in proportion to tipped minimum wage increases.
There is a strong body of historical evidence debunking union activists’ claim that tips remain unaffected by tip credit elimination. This new data concurs with economists’ findings – the tipping system employees across the country have fought to save is damaged by flat minimum wage policies.