Sadly, bad tax policy ideas can be contagious. 

The latest virus sprang from the Trump presidential campaign, then hopped on to the Harris campaign, and then landed here in Oregon. Mimicking the proposals by the presidential candidates, Oregon State Senator Dick Anderson recently took the initial step to introduce legislation that would exempt tips from state income taxes. 

Exempting tips from taxes would make our income tax system less fair while opening the door to yet more gaming of the system by the rich and powerful. That’s why it’s important to inoculate the public and policymakers against this bad idea and offer instead a real solution for what ails working Oregonians.

The unfairness of exempting tips from taxation stems from the fact that it gives preferential treatment to the income earned by one type of worker, putting other workers at a disadvantage. 

Consider the following scenario. Sally, a single parent raising a child, works as a bartender. In a year, she makes $20,000 in wages and $25,000 in tips, for a total of $45,000 in income. Maria is also a single parent raising one child, and she works as a nursing assistant. All of her income for the year, also $45,000, is in the form of wages. If tips were exempted from state income taxes, only $20,000 of Sally’s income would count toward taxes, compared to all of Maria’s income.

There is no policy or moral reason to treat bartenders differently than nursing assistants, retail store workers, or any other kind of worker. There’s no good reason to treat Uber drivers, who earn tips, differently than Amazon drivers, who don’t.

The obvious unfairness of exempting tips from taxes is not the only problem with the policy. Enacting it would also create yet another tax loophole the rich would seek to exploit.

If income from tips were no longer taxable, you’d soon have hedge fund managers, lawyers, and other well-paid professionals trying to reclassify their fees as “tips.” CEOs and stock brokers would soon start earning tips rather than bonuses.

History shows that such shenanigans are what you get when you treat one type of income differently than another. Case in point is the infamous carried interest tax loophole. It allows private equity and hedge fund managers to reclassify their wages as investment (capital gains) income, which is subject to a much lower tax rate, resulting in a massive tax break for some of the wealthiest people in the nation.

The Senator from Lincoln City is right to stress the need for “policies that put money back in the pockets of those who need it most,” but creating opportunities for the rich to game the tax system is not the way to do it. Nor is giving preferential treatment to one slice of workers over others.

“Slice,” by the way, is the right description for the share of workers who would benefit from exempting tips from taxes. Nationally, only about 2.5% of workers earn tips, and many of them earn incomes so low that they don’t pay income taxes. So not only would exempting tips from taxation introduce a new inequity into the system, it would do little to address the widespread economic insecurity that afflicts Oregonians.

A better approach is to help all workers struggling to make ends meet, regardless of whether they work in restaurants, nursing homes, or wherever. And the most effective way of accomplishing that is clear: boost Oregon’s Earned Income Tax Credit, a refundable tax credit designed to put more money in the pockets of low- and moderate-income workers. Because it’s refundable, the EITC helps workers who don’t otherwise owe income taxes, unlike the tip tax exemption.

As good a policy as the Earned Income Tax Credit is, there is room for improvement.  Among states with an Earned Income Tax Credit, Oregon’s credit is small, standing at just 9% of the federal Earned Income Tax Credit (it’s 12% for families with children under 3 years of age). Another shortcoming is the fact the credit excludes childless workers younger than 25 or older than 65, even if their incomes are low enough that they otherwise would qualify for the credit — as if these workers don’t have bills to pay and basic needs to meet. Increasing the size of the credit and expanding it to currently excluded workers ought to be a top priority for lawmakers. 

Helping Oregonians struggling to make ends meet should be one of the highest priorities for lawmakers, but exempting tips from taxation is a misguided proposal. If the goal is to improve the economic security of cash-strapped families, then strengthen the Earned Income Tax Credit.