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Say “No” to Oregon Republican Push for No Taxes on Tips

What’s in the water in Salem?

On one side you have a phalanx of Democrats proposing the ludicrous idea of paying strikers unemployment benefits, which would make Oregon the only State in the country to grant unemployment benefits to striking public and private sector workers.

Not to be outdone in making nonsensical proposals, now you have a raft of Republicans, mimicking President Trump, proposing that the state forego taxing tips.

Here’s a tip – exempting tips from state taxes is a bad idea.

In their determination to position themselves as supporters of the working man (and woman), 21 of Oregon’s House Republicans have proposed a bill, HB 3914, to end taxation of tips, which are generally perceived as discretionary payments determined by a customer that employees receive from customers.

As written, the bill would not count “service charges” as tips. A restaurant, for example, recently added an automatic service charge equal to 18% of my bill. Even if that was intended to cover for a “no tipping” policy, it would be part of the server’s wages because it was not discretionary.

The 129-word Oregon bill gets right to the point, “There shall be subtracted from federal taxable income any amount of tips properly reported as wages on the taxpayer’s federal income tax return.”  That would automatically subtract tips from taxable income in Oregon, too. 

The bill deserves a quick death.

According to the IRS, “All cash and noncash tips received by an employee are income and are subject to Federal income taxes. All cash tips received by an employee in any calendar month are subject to social security and Medicare taxes and must be reported to the employer.” So, tip income is taxable income.

Charges automatically added to a customer’s check by an employer and subsequently distributed to employees are not tips; they are “service charges”. These service charges, which are appearing more often on Oregon restaurant bills, are non-tip wages and are subject to Social Security tax, Medicare tax, and federal income tax withholding.

Many consumers think the expanding pressure on customers to leave tips is already out of hand. A no tax on tips policy would likely expand the use of tipped work even further, potentially leading to consumers being asked to tip on virtually every purchase everywhere. 

A  New York Times article about tipping generated a lot of comments, many of which lamented the seeming spread of tipping expectations to multiple businesses and regardless of the amount of actual service by an employee. “Collectively, we cringe when the iPad is swiveled into our face at the coffee counter or deli; we know it is extortion rather than appreciation for services rendered,” said one person.  

There’s also a sense that some businesses are customizing the tip configuration on screen to exploit customers. Most people tip between 15-20%. If you buy a $2.85 espresso and the screen offers 15%, 20% and 25% tip options, you are likely to hit 15%, generating a tip of 43 cents. If a business wants to jack that up, however, it can give you $1, $2, or $3 options on purchases below $10, instead of a percentage. If you pick $1, you have paid a 35% tip. Devious, but effective.

Despite the massive increase in tipping expectations in recent years at multiple businesses, tax experts say a relatively small share of the workforce depends on tips. Only about 2.5% of American workers are in occupations that depend on tips, according to the IRS.  Among those workers, 37% earn less than the federal standard deduction. So, they already don’t have to pay federal income taxes.

Other tipped workers benefit from the earned income tax credit (EITC) and/or child tax credit (CTC) to the extent that they don’t have any federal income tax liability. In addition, because tipped workers would keep more of their income, employers could use this law as a justification for lowering workers’ base pay if it is currently above the minimum wage.

In fact, exempting tips from taxation can actually lead to situations where low-income workers end up effectively losing income through losing eligibility to tax credits such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC).

The Budget Lab at Yale, a non-partisan policy research center, estimates that less than 3 percent of families would benefit from a broad-based income tax deduction for tips in 2026, but it would still cost the federal government more than $100 billion over the next decade. Restricting eligibility to workers in the leisure and hospitality industries would reduce the cost by more than 40 percent, but that would still leave a big hit on the deficit unless taxes were raised elsewhere.

Even the liberal Oregon Center for Public Policy opposes the no tax on tips idea.

In October 2024, Daniel Hauser, Deputy Director of the Center, said that ending taxes on tips “makes the tax system less fair” because workers receiving tips would get a tax break, but not low-paid workers in general.

If you have two workers, one a bartender who earns about $10,000 of his $40,000 annual income in tips and the other a warehouseman who makes all of his $40,000 income in wages, it wouldn’t make sense to give the bartender a tax break but leave the warehouse worker hanging out to dry, Hauser argued. 

 It also “creates openings for people to think about, how can my income be categorized as a tip and get this tax break too?,” Hauser wrote.  Third, he said, “if the goal is to help the economic security of low-income workers, it’s not very effective…and there are much better ways for us to try and help low-income families in Oregon.” 

He’s right.

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The Oregon Food Bank Antagonizes Oregon Jewish Groups Over Gaza

Non-profit groups, like many academic institutions and corporations, have gotten in the unfortunate habit of opining on sensitive political and cultural issues. And they are paying a price. They often learn, too late, that their outspokenness is like stepping on a landmine.

A Portland-area non-profit taking issue with Israel’s actions in Gaza, to illustrate, is facing a backlash from local Jewish groups.

.In April the Oregon Food Bank drafted a statement calling for a ceasefire in the Israel-Hamas war. 

The statement also accused Israel of perpetuating a “war against Palestine,” and said the Israeli military was “indiscriminately” hindering relief efforts in the region.

“As Oregonians, our tax dollars are funding the Israel army’s violence”, the statement said. “We call for immediate humanitarian aid and an end to Israel’s violence against Palestinians…”

The Food Bank’s president, Susannah Morgan, wrote to Oregon Public Broadcasting (OPB) that this kind of stance on an international conflict was a first for the organization.

The Food Bank has not expressed similar concerns about Russia’s indiscriminate killing of Ukrainians, the conflict in Sudan or Bashar al-Assad’s brutal war in Syria.

On June 4, the Food Bank issued a “statement to our community” thanking its supporters after its pronouncement generated controversy and a protest from local Jewish groups. . “Over the past few days, many of you have reached out, commented, posted, published written statements, signed petitions and donated in solidarity with Oregon Food Bank. Thank you for your support. We are touched by the overwhelming support we’ve received from community members…” 

But a dozen local Jewish organizations[1] persisted in their condemnation of the Food Bank’s actions. In a letter, they expressed their “deep disappointment” in the Food Bank’s statement and asserted, “In our view, the false accusations serve to further the flames of Jewish hatred.”

The letter made clear that financial support for the Food Bank from the organizations would cease and be directed, instead, to other organizations until such time as the Oregon Food Bank “…retracts its statement and issues one indicating it will maintain its focus on hunger and its root causes here in Oregon.”

You’d think the Oregon Food Bank would have been smart enough to have foreseen the consequences of stepping out front on the Gaza war., a divisive issue if there ever was one. 

A little knowledge of history would have given the Food Bank caution. 

In July 2023, for example, the CEO of Goya Foods said at a White House roundtable of Hispanic leaders, “We’re all truly blessed to have a leader like President Trump.” All hell broke loose, as his comment sparked ire against Goya from Trump opponents. 

Some employees, particularly young college educated ones, may push organizations to take strong public stances on controversial issues, but it can have devastating consequences in the public arena. If institutions fail to stand above divisive issues, choosing, instead, to add to public divisiveness, society becomes poorer for it. 

In April 2024, Bloomberg reported that a new survey of 600 C-suite leaders showed that nearly nine in 10 are now wary of wading into world events. Some 87% said that taking a public stance on current issues poses a greater risk for their company than not saying anything.

With 501(c)(3) non-profits, there is also the fact of restrictions on their political activity. They are generally not permitted to get involved in political issues and are permitted very limited lobbying. They may engage in general voter education about issues, including those which affect its mission, but only so long as all viewpoints are represented.Failing in that respect by taking a stand on current issues can affect a non-profit’s tax-exempt status.

Nonprofits should take heed, including whoever replaces  Susannah Morgan when she leaves her post in December.

[1] Jewish Federation of Greater Portland; Jewish Family and Child Service;  Mittleman Jewish Community Center ; Oregon NCSY;  Oregon Jewish Community Foundation; Portland Jewish Academy;  Portland Kollel; Congregation Beth Israel; Congregation Neveh Shalom; Congregation Shaarie Torah; Congregation Keser Israel; Congregation Ahavath Achim

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Mark-to-Market: A Terrible Idea from the Oregon Center for Public Policy

The liberal Oregon Center for Public Policy (OCPP), in its never-ending quest to soak the well-off, is advocating a big change in how capital gains are taxed. 

The problem is the idea is misguided, unworkable and would hit Oregon’s middle class as well.

And if If you think the federal tax code is complex and labyrinthine now, you ain’t seen nothin yet if mark-to-market is put in place.

In the name of addressing income inequality, OCPP is proposing that capital gains on assets be paid annually rather than when the assets are sold, as under current law. In other words, if the value of your assets such as stocks, bonds, real estate, a business, or even a work of art. goes up, you would owe taxes on the increase, even if you didn’t sell anything. The proposed approach is called “mark-to-market”.

“Oregon currently has several tax breaks favoring capital gains income that collectively cost the state more than $1 billion per budget period,” the OCPP says in a just posted issue brief. “Lawmakers should reject any proposal to further cut taxes on capital gains income and reign in tax breaks that benefit capital gains income.”

The current system “allows the wealthy to amass vast fortunes,” OCPP argues. “Because such assets are highly concentrated in the hands of the rich, the income produced by the sale of those assets flow to the top,” the issue brief says. 

One major problem with the mark-to-market proposal is that, despite OCPP’s attempt to position it as a tax-the-rich idea, it would affect all investors.

OCPP’s proposal would also be a nightmare to implement, particularly because it would require taxpayers to value assets annually. 

And a share’s price at the end of a year reflects an unrealized gain or loss unless it is sold. As the Wall Street Journal has explained, ” A tax on unrealized capital gains thus amounts to a tax on unrealized future profits that in many cases will never be realized, except at losses—especially if added taxation increases the likelihood of unrealized profits. Remember Kmart, RadioShack and Blockbuster? Their stockholders once had unrealized capital gains.” At the end, they had nothing.

Changes in stock prices of publicly traded companies are usually easy to determine. Figuring the changing value of many other assets can be a lot tougher.

“Ownership of private businesses, artwork…and other luxuries, among other assets, are difficult to appraise,” according to the National Taxpayers Union Foundation. “These assets may have limited markets for them, or no markets at all, making valuation a guessing game. In such a scenario, naturally the incentive for a taxpayer will be to minimize the value of such assets while the incentive for revenue officials will be to maximize the value, setting up a highly-adversarial relationship that could lead to administrative difficulties from lack of independently-verifiable comparisons.”

OCPP’s proposal could also artificially drive down market prices. Savvy stock market investors, knowing their taxes will be impacted by their portfolio’s value at the end of each year, will be inclined to sell assets, driving down stock prices to minimize tax liability. 

In an October 28, 2021 paper, the Congressional Research Service said another concern about mark-to-market is liquidity. Some high-income individuals may have no problem coming up with the necessary cash. Others, particularly middle-income taxpayers, might have a hard time doing so. 

As S-Corporation Association of America put it, “…unrealized gains are not income.  You can’t spend them.  If you could, they’d be realized gains.  And while the (Washington) Post and other observers are fond of talking up the ability of billionaires to borrow, most S corporation owners don’t have unlimited borrowing capacity.  Depending on how leveraged their business is, they might have no capacity at all.”

Or as the National Taxpayers Union Foundation has opined, “Just because an investor’s underlying assets appreciate in a given year does not mean that the investor has sufficient cash to pay any tax liability.”

In short, OCPP’s mark-to-market proposal is a half-baked idea. It deserves a quick demise.

ADDENDUM:

On Jan. 17, 2023, the Washington Post reported that a group of legislators in statehouses across the country has coordinated to introduce bills simultaneously in seven states later this week, with the same goal of raising taxes on the rich.

“The point here is to make sure we do at the state level what is not being done at the federal level,” said Gustavo Rivera (D), a New York state senator who is part of the seven-state group.

The state legislators said they would like to try such ideas as a test case for future national policy while acting collectively to minimize the threat of people moving to a nearby lower-tax state. Sponsors told The Washington Post that they will introduce their bills on Thursday, January 19, in California, Connecticut, Hawaii, Illinois, Maryland, New York and Washington.,

Skeptics of wealth taxes say the idea might be even worse on a state level than a national level, since the rich can easily move to another state, the Post reported.

“High net-worth individuals are fairly mobile, and it is much easier to change residency to another state than it is to leave the country,” said Jared Walczak, who works on state tax policy at the right-leaning Tax Foundation.

In addition, he says, assessing the value of a person’s wealth would be challenging for state bureaucrats and sometimes lead to unfair results, as in the case of Silicon Valley founders, whose companies may have huge valuations on paper that are hard to assess or tax in a straightforward way.

“Just because a company might sell for hundreds of millions of dollars in the future doesn’t mean that its current owners have any significant wealth,” Walczak said. The on-paper net worth of billionaires fluctuates drastically as companies’ stock prices or valuations rise and fall, making it hard to figure out how much they should pay if taxed on that wealth, he added.

In four states, lawmakers say they will float versions of a tax on wealthy people’s holdings, or so-called “mark-to-market” taxes on their unrealized capital gains. But other states will pitch more conventional tax proposals.

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Tweedledee. Tweedledum: The two parties spend with abandon.

tweedledumTweedledee

Tweedledee. Tweedledum. This is what we get when the two parties work together, a massive spending spree.

A $1.1 trillion federal spending bill and a $650 billion tax package unveiled today show that neither party gives a damn about holding down spending. It’s not that all the items to be funded are wasteful or unneeded, but the package will push spending above previously agreed limits by $66 billion in 2016 and permanently extend a vast array of tax benefits that will add at least a half-trillion dollars to the federal deficit, once a matter of great concern.

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  • Bowing to pressure on Republicans and Democrats from medical device manufacturers across the county, including in Oregon, anti-Obamacare zealots, and ticked-off unions with expensive healthcare plans, the legislation will postpone for two years (which probably means forever) a 2.3 percent excise tax on medical devices manufacturers, that was expected to raise $29 billion of net revenues over 10 years and a so-called “Cadillac Tax” tax on expensive employer-sponsored healthcare plans, that was projected to raise about $30 billion over 10 years to cover new spending under Obamacare. Then, to add insult to injury, the legislation makes the Cadillac tax refundable when it restarts. The lost taxes will blow a hole in planned funding to cover the cost of Obamacare.
  • The Defense Department will get $1111 billion for new military equipment, including F-35 Joint-Strike Fighters, Black Hawk helicopters, attack submarines and guided missile destroyers.
  • A 40-year-old oil export ban will be rescinded and, in trade, Democrats will get expensive extensions of wind and solar power tax incentives.
  • A research and development tax credit will be expanded and extended permanently.
  • The $1,000 Child Tax Credit will be extended permanently.
  • The Earned Income Tax Credit will be permanently extended.
  • A federal health program for first responders and construction workers who worked at the World Trade Center site after 9/11 and a separate victims compensation fund will be extended at a cost of $8 billion.
  • A National Oceans and Coastal Security Fund will be created to “support work that helps Americans understand and adapt to forces like sea level rise, severe storms, and ocean acidification” associated with climate change.
  • The American Opportunity Tax Credit, an annual credit for tuition and other qualified expenses, will be permanently extended.
  • A $250 annual deduction on qualified expenses of teachers will be indexed for inflation and permanently extended.
  • Five tax credits tied to charitable donations by individuals and businesses will be permanently extended.
  • Funding for the IRS will be frozen, punishing the IRS for targeting conservative groups, but also further limiting its ability to go after tax scofflaws and, this, reducing tax receipts.
  • A $255 per month pre-tax benefit for parking and public transportation expenses will be permanently extended.

But aside from all the spending, Congress did accomplish a few good things.

There will be a pay freeze for Vice President Biden, for example.

Also, earlier this year the dour, stick-in-the-mud Capitol Police said sledding by gleeful children and adults on the snow of Capitol Hill would no longer be allowed. The package asks that the Capitol Police rescind that prohibition so the jollity can resume.

Capitol-Sledding