In their quest to win back the working-class vote, Democrats have recently taken one step forward and two steps back. For this week’s Closer Look, we’d like to tell you about these steps – and what we believe Democrats need to do to get on the right track.
Let’s start with the step forward. Last Thursday, Democrats in both the House and Senate introduced the Carried Interest Fairness Act. Representatives Marie Gluesenkamp Perez (WA-03) and Don Beyer (VA-08) introduced the legislation in the House, while Wisconsin Senator Tammy Baldwin led thirteen co-sponsors in introducing it in the Senate. The bill would eliminate the carried interest loophole and go a long way in unrigging the tax code so that it no longer unfairly favors the interests of the wealthy over working people.
The carried interest loophole is a favorite among Wall Street financiers. Essentially, the loophole allows investment managers at hedge funds, private equity companies, and venture capital firms to classify their share of the profits they help generate for their clients as capital gains rather than ordinary labor income. Because capital gains are taxed at a lower rate than ordinary income – the top marginal rate is 20% for capital gains and 37% for ordinary income – this translates into a large tax break for money managers, who already are some of the richest people in the world.
Investment managers like to argue that they deserve the tax break that comes with the carried interest loophole because they are in a “partnership” with their investor clients and because they run the risk of making nothing in carried interest because of outside market forces. Rest assured, their arguments are bogus and do not provide any moral or economic justification to keep the carried interest loophole on the books.
For one thing, hedge fund, private equity, and venture capital managers are really not in a “partnership” with their clients because they have none of their own money at stake in their work. They’re managing other people’s investments, not their own, and not taking any real risk. Further, these managers earn a set percentage of their fund’s total investments every year, no matter what. If the fund has a good year and turns an additional profit, then managers get a cut of it; it is this bonus that is “carried interest” and is taxed at the lower capital gains rate. The last time we checked though, millions of Americans in various industries earn bonuses every year and pay ordinary taxes on them. There is no reason why ultra-wealthy money managers, whose bonuses far exceed what the average American could ever dream of earning in a lifetime, should get a special tax break on theirs.
For these reasons, we strongly support the efforts of Democrats in the House and Senate to finally close this egregious and unjustifiable loophole. As fate would have it though, they have an unlikely supporter: President Trump! On the same day that Democrats introduced the Carried Interest Fairness Act, in a meeting with fellow Republicans, Trump outlined a number of measures that he would like included in the tax bill that they are working to pass this year, one of which was ending the carried interest loophole.
We’re happy to see Trump come out on the right side of this issue, but if we’re being honest, we won’t hold our breath for Republicans to do right by working people and close the loophole for good. They had that chance back in 2017 when they passed the Tax Cuts and Jobs Act and failed: instead of closing the loophole, they merely extended the holding period for applicable assets to three years.
All things considered though, we’re happy to see Democrats take a step forward in ending the carried interest loophole and are hopeful they’ll be able to do it in the current Congress with some potential bipartisan support. If they’re successful, they’ll be able to redeem themselves from what occurred during the Inflation Reduction Act negotiations back in 2022, when they were thwarted by former Senator Kyrsten Sinema in their effort to partly close the loophole.
So that’s the step forward. Now let’s get to the two steps back that Democrats have taken on the economy in recent days.
The first step back involves the situation with wages in Michigan that we told you about last month. Thanks to a ruling from the Michigan Supreme Court, the state’s minimum wage will gradually climb to $15 an hour by 2028 and its subminimum tipped wage will also be gradually phased out by 2030. The first in a series of gradual hikes will occur on February 21st, when the state’s minimum wage will increase to $12.48 an hour and the subminimum tipped wage will jump to $5.99 an hour.
Unfortunately, however, Republicans and Democrats are working to stymie this progress on wages, albeit in different ways and to different degrees. Republicans are in the majority in the Michigan House, and they passed a bill last month that would stretch the $15 minimum wage increase out to 2029 and keep the subminimum tipped wage in its current form at 38% of the full minimum. The Senate has yet to consider House Republicans’ bill, but Senate Democrats, who hold the majority, did hold hearings today about their own wage bill. Their legislation would speed up the $15 minimum wage increase to 2027, which is a welcome change, but also keep the subminimum wage on the books at 60% of the regular minimum, which is a far-from-welcome change.
Last month, Morris Pearl and Catherine Hadley, our Chair and Director of Partnerships respectively, sent a letter to Governor Whitmer, Senate Majority Leader Winnie Brinks, and the whole Michigan Senate Democratic Caucus urging them to reject any rollbacks of wages. Our position has not changed in the weeks that have passed, and we were discouraged to learn today that Governor Whitmer has called for a delay in next week’s scheduled tipped wage increase to give Democrats and Republicans more time to reach a compromise on the matter. It is imperative that Democrats only entertain improvements when it comes to wages, and let the scheduled increases occur as scheduled on February 21st. There can and should be no hint of “compromise” when it comes to doing what is best for workers.
It appears that Michigan Democrats inspired their co-partisans in Colorado to take the party’s second step back. Recent reporting has revealed that Representative Steven Woodrow and Senator Judy Amabile, both Democrats, plan to introduce a bill in Colorado’s current legislative session which would seriously affect its tipped wage workforce – and not in a good way. Right now, state law requires that every locality in Colorado maintains a $3.01 differential between its regular minimum wage and its tipped wage. What Woodrow and Amabile’s new bill would do is force all tipped workers to make the state-level subminimum wage of $11.79. This would result in a reduction in tipped workers’ wages in cities that have experienced minimum wage increases in recent years. For example, in Denver, the minimum wage is currently $18.81 and the subminimum tipped wage is $15.79. If Woodrow and Amabile’s bill passes, which is a real possibility as Governor Jared Polis has voiced his support for it, tipped workers in Denver will make $4 an hour less, which would come out to $5,000 less per year.
Restaurant associations in Colorado claim that reducing the subminimum wage would help restaurants struggling with rising costs in the post-pandemic economy, especially in cities with high minimum wages. But they unfortunately seem to have little concern for the workers that would be affected. We don’t think that subminimum wages should be a reality for any worker – all workers deserve a stable income and shouldn’t have to rely on the charity of customers to survive. But at the very least, no worker should have to endure a wage cut, particularly of the degree that these Colorado Democrats are proposing.
As we said last month, if restaurants want to ensure their long-term success, doing away with the subminimum tipped wage is the right way to go. Research has found that, in the eight states that mandate tipped workers be paid the full standard minimum wage with tips on top, servers and bartenders have higher take-home pay and experience lower levels of poverty compared to other states. They also have experienced higher restaurant industry growth, both in terms of number of restaurants and jobs. In other words, the numbers don’t lie: scrapping the subminimum tipped wage is what’s best for workers and businesses alike.
It’s worth noting that, at the moment, it would be better for Michigan and Colorado Democrats to do nothing with their states’ respective subminimum wages than go through with the bills that they’ve floated. There’s always more that can be done for workers in those states – especially considering that the minimum wage in both places doesn’t meet the cost of living – but, in this case, when all is said and done, not moving at all is better than taking two steps back.
Earlier this month, Ken Martin, the chair of the Minnesota Democratic Party, was elected the new chair of the Democratic National Committee (DNC). Martin has his work cut out for him in rebranding the Democratic party and restoring its once strong working-class voter base. It will not be enough for Martin and Democrats to simply point out all the flaws with Republicans’ agenda – which would take forever these days. Instead, they need to offer voters proactive and real economic policy alternatives that center the needs of working people.
Ending the carried interest loophole is one such proactive economic policy that has the potential to win back working-class voters. Preserving subminimum wages to any degree, and in any state or locale, is not.
Working people across the country are suffering. They literally can’t afford any more financial steps back. The only acceptable direction for Democrats to take for working people when it comes to the economy is forward. Only then can they hope to regain their position as the party of the working class.