Nationwide, left-leaning policymakers continue pushing for a higher federal wage floor. From New York City’s Mamdani-led drive toward a $30 minimum by 2030, to Los Angeles’ $30 “Olympic wage” for hotel workers, and Seattle’s efforts to set wage standards for the gig economy, the momentum to raise pay keeps growing. In this vein, congressional Democrats have joined the discussion by introducing the Living Wage for All Act, led by Senator Chris Murphy (D-Conn.).
Murphy’s proposal has drawn attention by proposing to lift the federal minimum wage from its current $7.25 per hour to as much as $25 per hour in the coming years. (This would establish a wage floor that would apply in any state where the federal minimum is higher than the state level). Yet a crucial facet of the bill that has received less notice is its plan to eliminate the tip credit for restaurant workers and other tipped employees.
The tip credit enables servers and others in the hospitality sector to earn less than the statutory minimum wage on an hourly basis, provided their tips fill the gap. For more than six decades, this mechanism has been a cornerstone of the restaurant industry, and it frequently allows waiters to earn well above the minimum wage. (According to the National Restaurant Association, the national median wage for waiters hovers around $27 per hour.)
Doing away with the tip credit could impose burdens on both restaurants and tipped workers, particularly when considering how customer behavior, tax rules, and payroll practices interact. First, eliminating the credit could dampen customers’ tipping in the long run, as society might shift away from the expectation of leaving gratuities.
Census Bureau data show that when the tipped minimum wage increases, the portion of compensation covered by the employer rises, while tip income falls by a roughly similar amount, leaving total earnings roughly unchanged. Tipping remains a cultural norm, which could persist for some time, but in an era of tipping fatigue, diners might welcome the chance to do away with tips altogether.
A second consideration is how restaurants are likely to respond to the elimination of the tip credit. In our state-level “laboratories of democracy,” there are already instructive examples. Kurt Huffman, a co-author of this piece, runs several dining establishments in Portland, Oregon. Oregon has prohibited a tip credit for years, giving Huffman firsthand insight into how restaurateurs typically react when the tip credit is removed.
Many restaurants in environments without a tip credit add mandatory service charges to checks or adopt what are known as auto-gratuity policies. For instance, a restaurant might automatically add an 18–20 percent fee to a patron’s bill. While this “auto-grat” ensures a tip is paid, the caveat is that the tip ceases to be the property of the server and becomes the restaurant’s. The restaurant then generally retains a portion of that tip (often 25–40 percent) before distributing the remainder to the employee.
That distinction matters. A mandatory service charge is not considered a tip under IRS rules. It counts as employer revenue; if the restaurant later distributes any portion of it to employees, the distributed amount is treated as wages.
This dynamic can—and often does—diminish the worker’s take-home pay. If a restaurant withholds part of the mandatory service charge, as is common, the worker may end up earning less than they would have from a voluntary tip on the same bill. The calculation worsens under the new qualified-tips deduction, popularly known as “No Taxes on Tips.” Qualified voluntary tips can be deductible from federal taxable income up to $25,000, but mandatory service charges and auto-gratuities are not eligible for such treatment.
Restaurants adopt these service charges in part to avoid raising menu prices. That rationale is understandable, but it overlooks how customers perceive price on a menu. As Huffman notes from more than three decades in the business, patrons do not treat every dollar on a check the same way.
There are “menu dollars” and “manners dollars.” A $20 salad with a voluntary $4 tip does not yield the same perception as a $24 price tag. The $20 reflects the product itself, while the $4 represents a social custom. But a $20 salad accompanied by a mandatory 20 percent service charge blurs these boundaries. The restaurant has not avoided a price increase; it has shifted the rise to the bottom of the check, where it can feel like a surprise or an imposed choice.
Another reality is that places that recently moved to eliminate the tip credit have quickly come to regret the move. Washington, D.C., famously scrapped its tip credit in a 2022 ballot measure. Under the new regime, the statutory minimum wage for waiters would rise from $5.35 per hour to the district’s full minimum wage—a change that initially seemed clearly favorable for servers.
But soon after, D.C. experienced almost a 5 percent decline in full-service restaurant and bar jobs in the wake of the tip credit’s elimination. Tipped workers’ earnings reportedly fell by about $11.8 million as many restaurants reduced hours and waiters saw smaller tips. The outlook was so grim that the progressive D.C. Council voted to retreat from the total elimination of the tip credit.
In Chicago, which did away with the tip credit in 2023, roughly 89 percent of restaurants have raised menu prices due to higher labor costs, while 79 percent have cut worker hours, according to the Illinois Restaurant Association. Consequently, Chicago’s liberal city council attempted to partially reverse course on the repeal, but Mayor Brandon Johnson vetoed the measure.
The Living Wage for All Act promises help to workers by erasing the tip credit. Yet real-world experience indicates the idea is underspecified. Higher mandated wages can look favorable on pay stubs while still leaving workers worse off if tips fall, hours are reduced, or service charges replace qualified voluntary gratuities.
Policymakers should not weaken a compensation framework that can deliver more after-tax dollars to workers. And restaurants facing higher wage mandates should not respond with mandatory fees that irritate customers and tax staff even more. The objective is straightforward: maximize the portion of each guest’s bill that ends up as after-tax take-home pay for workers.
The best way to achieve that is to preserve the tip credit system and send the Living Wage for All Act back to the kitchen.
