Tax break for tips, overtime misses the mark

Let’s Help Workers the Right Way — Not With Gimmicks

By Sean Finn, CGI Policy Analyst

Let’s help workers the right way — not with gimmicks

Iowa’s working class is struggling. One in six Iowans working full time doesn’t earn enough to cover a basic family budget without public assistance (CGI). That’s not a moral failure — it’s a policy failure. When work doesn’t pay, it’s time for serious economic solutions. But proposals advancing in the Iowa House — specifically HF 1024 and HF 1030, which would remove income tax on overtime and tipped income — are shiny distractions that do little to help.

While these bills may sound like a break for hardworking Iowans, they’re poorly targeted and poorly designed. Carving up the income tax base with exemptions like these:

• Complicates the tax code while offering little help to low-wage earners.

• Primarily benefits those in higher-income households who work extra hours or earn substantial tips, rather than those struggling at the bottom.

• Erodes the tax base, which leads to reduced funding for the very public services working families rely on — schools, child care and infrastructure.

Our income tax system is already simple when it comes to wages: It treats all income the same, whether it’s from regular hours, overtime or tips. And that’s how it should be. Adding carveouts means adding new paperwork, new confusion and new loopholes. If lawmakers want to help workers, they should focus on making sure workers are paid fairly and treated justly — not on fiddling with line items in the tax code.

Low-income workers face real problems greater than their annual Iowa income tax bill: Iowa employers cheat workers out of an estimated $900 million in wages every year through wage theft, including stolen tips and unpaid overtime (A Heist in Plain Sight). Despite costing workers more than all other types of theft in the state combined, wage theft is handled by a small team of investigators that recovers only a minute portion of the total damages. Rather than pandering to overtime and tipped income with tax breaks, lawmakers should do more to ensure workers are getting paid what they’re owed in the first place.

At the end of the day, income is income. Our tax code should reflect that. We don’t need to play favorites with occupations or types of hours worked. We need a tax system that’s fair, straightforward and based on what a person actually earns, reflecting ability to pay. We have moved away from it with the recent change to a flat rate income tax that favors the wealthy, and special breaks won't fix it.

There are much better ways to help working Iowans:

• Raise the minimum wage, which has been stuck at $7.25 since 2008.

• End the sub-minimum wage for tipped workers, which lets employers pay as little as $4.35 an hour.

• Establish and enforce a statewide overtime law, rather than relying entirely on federal protections.

• Expand the Earned Income Tax Credit to boost take-home pay for low- and moderate-income households.

• Enforce laws against wage theft with real penalties and real accountability.

Helping workers starts with policies that treat work — and the people who do it — with dignity. We shouldn’t settle for gimmicks when we can demand real change.

Sean Finn is a policy analyst at Common Good Iowa. Contact: sfinn@commongoodiowa.org.