Rhode Island’s Anti-Tip Credit Bills Ignore the Realities of the State’s Restaurants

This week, the Rhode Island House Labor Committee heard public testimony regarding various minimum wage hike proposals. Two of the bills up for consideration, H 5590 and H 5928, which both seek to eliminate Rhode Island’s tip credit and raise the hourly base wage for tipped restaurant workers by nearly 300 percent. The hearing was filled with local restaurant operators who spoke on behalf of their businesses and employees and how tip credit elimination would harm their survival.

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 local stakeholders.

Read the full testimony below:

Thank you Chairman Corvese and members of the Labor Committee. My name is Rebekah Paxton, I serve as the Director of Research at the Employment Policies Institute, which specializes in analyzing the impacts of minimum wage bills at the state level.

Tip credit elimination is opposed by economists, employees, and restaurant operators. HB 5590 ignores the realities of Rhode Island’s restaurant industry, and would jeopardize thousands of employees’ jobs, slash even more employees’ income, and threaten the survival of the already-embattled restaurant industry. States that have eliminated their tip credits have left tipped restaurant employees worse off than states that allow them, and Rhode Island should avoid this costly experiment.

Rhode Island state law currently requires restaurants to ensure that tips plus the base cash wage equal at least the regular minimum wage rate. But the reason many employees join the industry is because they can earn far more than the minimum wage while taking advantage of unique flexibility and skills the restaurant industry provides.

When the tip credit is taken away, restaurants are forced to weigh potential menu price hikes, reducing staff, or switching to no-tipping policies. Menu price increases for customers might drive away foot traffic, meaning fewer bills for employees to be tipped on. Staff cuts leave servers and bartenders without their jobs and tip income all together.

As a result, economic evidence shows laws eliminating state tip credits turn an occupation with unlimited earning potential into a flat minimum wage job.

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 1,900 Rhode Island servers and bartenders their jobs.

Second, eliminating tip credits costs tipped employees their hard-earned income. Some proponents say servers and bartenders will just get “tips on top” of the higher tipped wage when the tip credit is eliminated. Research shows this is false.

    • 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 the families of Rhode Island’s tipped restaurant employees up to $6,000 in earnings every year.

Third, restaurants could be forced to shut down altogether. Harvard University Business School estimates for every 1 dollar increase in the tipped minimum wage, restaurants were 14 percent more likely to shut down.

Employees across the country have led the charge to defeat bills like this, because they know their industry. In Portland, ME, tipped restaurant employees led the charge to educate the public on why tip credits allow them to make good money in the industry. They defeated a ballot measure to eliminate the tip credit by a 20-point margin. Every other New England state has protected its tip credit, even while raising the regular minimum wage rate.

If employees, restaurant owners, and economists agree that bills like HB 5590 have these harmful effects, I respectfully urge the Committee to protect tips and vote against HB 5590. Thank you.