Youngkin pitches tax relief for tipped workers in budget plan – Virginia Mercury

“Governor highlights plan to eliminate state taxes on tips, with 250,000 Virginians in food and hospitality industries set to benefit.”

The governor’s proposal could help many low-wage workers.  But it poses risks and raises issues including:

  • The policy would not be equitable in that tipped workers would pay lower taxes than salaried workers with the same income. Another equity issue: To control tax dodging by higher income salaried professionals, legislators need to specify which types of workers would not pay taxes on tips and which would still have to pay tax.
  • The policy creates an incentive for employers to reduce tipped worker wages to the minimum allowed under federal and state laws, which is $2.13 an hour in Virginia.  Employers could tell workers that receiving a larger portion of income through tips would reduce their taxes.
  • The policy would reduce state tax revenue and, due to behavioral changes, reduce federal payroll tax revenue which supports Social Security and Medicare.

While keeping its tipped minimum wage at the least allowed under federal law, Virginia has raised its regular minimum wage to $12 an hour, rising to $12.41 on New Year’s Day after an inflation adjustment.   Whether it decides to exempt some or all tips or not, the state could raise its tipped minimum wage to a point much closer to the regular minimum level, which could mitigate tax revenue loss and help tipped workers in job environments where tips or business volume are low.  Some workers receive generous tips and prefer their income in that form.  Others benefit from a higher base salary.   For employers, complex federal rules around minimum wages for tipped workers – which require paying more cash wages in hours when tips are low – can be difficult to comply with.  

One possible rule of thumb for states could be setting the tipped minimum wage at least at half the amount of the regular minimum wage.  Some states already do this.   A few states already require employers to pay tipped workers at least the regular minimum. 

Minimum Wages for Tipped Employees – US DOL