The Folly of a 127-Percent Maryland Tipped Wage Hike

This spring, Maryland legislators will consider Senate Bill 569, which would increase the state’s minimum wage for tipped employees by 127 percent—overnight.

This isn’t a fight about whether employees who earn tips should be covered by the state’s minimum wage law: They already are, and they’re guaranteed at least $8 an hour, the same as everyone else.

In fact, these aren’t minimum wage employees at all: Census Bureau data shows that tipped employees in Maryland self-report an average wage of over $14 an hour—76 percent more than the state’s minimum wage.

What this policy fight is about is what happens when a state makes the radical decision to no longer consider tips as income earned on the job. The IRS doesn’t believe it, and either does the state’s comptroller. But seven states have decided to set the tipped minimum wage equal to the full minimum wage, and we have plenty of evidence to evaluate the merits.

In a study published in the Southern Economic Journal, economists studied two decades of data on states raising their tipped minimum wages, and found clear evidence of a reduction in full-service restaurant employment following the policy change. You can see this impact in cities like Seattle, where restaurants stopped hiring bus boys, and staffed fewer servers per shift.

Of course, some proponents argue that legal changes like this have no consequences. But not even their supporters believe this. For instance, in a 2013 interview with MSNBC, celebrity chef Tom Colicchio—deemed a “high road” employer by one the most vocal advocacy groups on this issue—explained that restaurant prices would have to rise by a staggering 25-30% if the tipped wage was set equal to the minimum wage.

Right now in Oakland, CA, an overnight 36 percent minimum wage increase—in an environment where the tip credit has already been eliminated—forced some restaurants to raise prices by as much as 20 percent, caused others to eliminate tipping, and even contributed to the closure of four restaurants in the city’s Chinatown area. Across the Bay in San Francisco, one of that city’s top 100 restaurants closed in February—again, due in part to a coming wage increase that’s happened in an environment with no tip credit.

Both the data and the anecdotal evidence show that a tipped wage increase is a bad idea. This bill is a solution in search of a problem–and Maryland won’t have a problem until it decides to raise the tipped wage by 127 percent.