Arizona Proposition 138 would change the minimum wage for tipped workers

Summary

Arizona Proposition 138 is a legislatively referred constitutional amendment that would change the structure of minimum wage for tipped workers. Under current law, workers who regularly receive tips from customers can be paid up to $3 less per hour by the employer so long as the worker’s total reported compensation is at least equal to the statewide minimum wage. This reduction in employer-provided wages is known as a “tip credit” against the minimum wage.

Proposition 138 proposes to change the maximum allowable tip credit from $3 per hour to 25% of the minimum wage. In 2025, Arizona’s minimum wage—which is indexed to inflation—will increase from $14.35 to $14.70 per hour. That means the allowable tip credit would change from $3 to $3.67 per hour if Proposition 138 is approved. However, employers would only be able to utilize the tip credit if the employee’s total compensation is at least $2 per hour higher than the minimum wage. So, the minimum compensation for tipped workers would rise above the minimum wage for other workers, but employers would be able to claim a slightly higher tip credit because a portion of the employee’s compensation is derived from tips.

Legislators proposed Proposition 138 in June, at least in part, as a response to a competing initiative—Proposition 212—that would have eliminated the tip credit and raised the minimum wage statewide to $18 per hour. Proposition 212 was withdrawn by its sponsors in August after failing to collect enough signatures to qualify for the ballot.

Fiscal Impact

Legislative analysts did not develop a concrete estimate of Proposition 138’s fiscal impacts. However, they identified several key economic trends that could have a fiscal impact as a result of its passage. Higher wages could impact business activity or profits, employee wages, and consumer behavior to the extent that higher wages are passed onto consumers as higher prices. 

Fiscally, these changes could manifest themselves in state individual income taxes, corporate income taxes, and sales taxes. Analysts concluded that “the overall impact on state revenue collections cannot be determined in advance.” State spending on means-tested programs could also be affected, although analysts could not determine this impact in advance.

In particular, analysts note: “While there is considerable academic research on the effect of increases in the hourly minimum wage, research on the effects of the minimum wage tip allowance is more limited.”

Proponents’ Arguments

Proposition 138 received the support of all Republicans and four Democrats in the Arizona House and passed along party lines with Republican support in the Arizona Senate. The legislative proposal was backed by the Arizona Restaurant Association after the sponsors of failed Proposition 212 began gathering signatures. Rep. Justin Wilmeth (R-Phoenix), who sponsored Proposition 138 as a legislative measure, referenced the competing proposal as a motive for his effort, saying:

“We all know that the restaurant industry is a very small profit industry. If you have a disparity in a forced raise of costs for a business, they will either shut down, limit staff or make other alternatives.” 

Grant Krueger, a restauranteur aligned with the Arizona Restaurant Association, told reporters that many servers in his restaurants earn more than $41 per hour when tips are included. If he were forced to pay a higher minimum wage directly and could not claim a tip credit, he would need to raise menu prices. He also argued the restaurant experience would change as more restaurants use electronic kiosks to replace higher-priced labor, saying:

“We’re going to see more and more tablet based ordering and QR based ordering, as opposed to the full service hospitality experience that our customers have known to love and to appreciate.”

Opponents’ Arguments

Proposition 138 is opposed by Raise the Wage Arizona, a local affiliate of One Fair Wage, a national organization that has sponsored ballot initiatives in 25 states to raise the minimum wage. Raise the Wage Arizona also organized the failed Proposition 212.

Raise the Wage Arizona attorney Jim Barton argues that Proposition 138—titled the “Tip Workers Protection Act”—is misleading. Barton filed a lawsuit seeking to disqualify Proposition 138 from the ballot shortly after it was approved by lawmakers based on these arguments. In early August, Maricopa County Superior Court Judge Peter Thompson denied Barton’s challenge, noting the court does not have the authority to remove a proposed initiative from the ballot simply because it makes passage of a competing ballot measure more or less likely.

Barton has also responded directly to claims made by Grant Krueger, arguing that if Proposition 138 passes, “that server who was making $41 an hour will now make $40.40 an hour…I don’t know that anyone can say with a straight face that 60 cents an hour, one way or another, is going to shut down the restaurant industry or mean they’re going to have to start using QR codes.”

Discussion

Despite conflicting portrayals by proponents and opponents, Proposition 138 would unambiguously raise the minimum earnings of a tipped worker by $2 per hour. It would also allow a modest increase in the tip credit employers are allowed to claim to satisfy this requirement. 

Most states allow employers to apply some tips received by tipped workers toward satisfying a minimum wage requirement. Only seven states—Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington—do not allow for a tip credit. The U.S. Department of Labor maintains a database of state laws relating to minimum wages for tipped employees. Its July 2024 edition reveals that Arizona currently offers the fourth-smallest tip credit, at $3 per hour, among the 43 states that allow for a tip credit. Hawaii’s tip credit is the smallest, at $1.25 per hour, while Maryland’s is the largest, at $11.37 per hour. The federal standard, which prevails in 15 states, allows for a tip credit of $5.12 per hour, while the federal minimum wage is $7.25 per hour. As a result, federal law requires employers of tipped employees to pay at least $2.13 per hour directly to employees as long as the employer can document that the employee received at least $5.12 per hour in tips.

Arizona’s minimum wage is already substantially higher than the federal standard. As a result of Proposition 206’s passage in 2016, Arizona’s minimum wage rose gradually to $12 per hour by 2020 and was thereafter indexed to inflation. Employers were also required to offer paid sick leave. According to federal data, Arizona’s minimum wage was the tenth-highest nationwide in 2024. The state with the highest minimum wage was Washington, at $16.28 per hour. Net of the tip credit, only four states—California, Colorado, Oregon, and Washington—impose a higher minimum wage than Arizona.

If Proposition 138 is approved, these rankings will change slightly for tipped workers. The minimum wage for tipped workers would be $2 per hour higher than for all other workers in Arizona, rising to about $16.70 per hour in 2025 after the minimum wage is again adjusted for inflation. That wage would exceed the current minimum wage for tipped workers in every other state.

The Common Sense Institute, a nonpartisan research organization in Arizona, attempted to model the macroeconomic effects of Proposition 138 using a common input-output mathematical model of the local economy. The model assumed all bartenders and servers and approximately half of other customer-facing restaurant employees would experience a $3 per hour boost to wages. Federal data show this group of employees in Arizona currently averages $22.04 per hour, including tips. The model concludes that consumer prices in restaurants and bars would rise 1%, Arizona’s overall economic output would decline by $500 million and personal income would fall by $700 million as consumer behavior adjusts to a relative rise in prices for restaurants. The model also expects 1,935 net job losses in the restaurant and bar industry by 2030.

The evidence on how minimum wages affect workers is clear: 

• Some workers get a pay increase.  
• Many teenage and young adult workers see their jobs cut. Despite the individual studies supporters will point to showing no job cuts, there are vastly more studies that find job reductions from minimum wage hikes. 
• Many more workers see their hours cut.  
• Other workers have benefits cut, especially healthcare. 

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Source: https://reason.org/voters-guide/arizona-proposition-138-would-change-the-minimum-wage-for-tipped-workers/