2017-03-10 / Opinion

Reinstatement of the Tip Credit is not a Political Battle, it’s Math

Guest column

In the political sea of misinformation and alternative facts which we wade through daily, one of the most dangerous local platitudes is the false narrative the Maine People’s Alliance continues to put forth regarding the passage of Question #4. Make no mistake, the minimum wage needed to be raised; but to include the removal of the tip credit in Maine — the only New England state and the only state east of the Mississippi River to do so — is unprecedented and dangerous.

We are in no economic position to experiment with the elimination of the tipped credit as we enjoy the worst ranking in New England for business and 49th in the country and there is no proof that this experiment will work here. The creators of this referendum have never produced a financial model to prove the financial viability of this immense change in FULL SERVICE operational costs. I am not interested in research papers, paid for by labor unions, I want to see operational math.

As Yogi Berra said: “In theory there is no difference between theory and practice. In practice there is.”

Here’s some simple math: A restaurant has $1 million in sales: 30 percent goes to labor and 30 percent goes to cost of goods, that leaves 40 percent for: rent, maintenance and cleaning, interest, insurance, credit card processing, repairs, marketing, licensing, use taxes, legal, accounting fees and profit. If you are reaching your sales goals and you haven’t overspent on any of these items and you don’t have a lot of debt you MAY see 5-8 percent profit. Let’s use 8 percent as an illustration. That’s fantastic, right? $80,000 profit if you make no mistakes: it’s a good deal. Not so fast, you need to keep half of that in the business as retained earnings for the first payroll, purchasing and expense period of the new year, as well as cash flow for the first quarter, notorious for snowstorms and lower sales.

At the end of the escalation of this referendum language in 2024, when the tip credit is gone, and minimum wage is $12 an hour across the board, IF we still have servers that want to work on a busy Saturday night, vs a simple Tuesday lunch (their compensation will be the same on either shift), the labor line item goes from 30 percent to 49 percent. If you’re following along, the new net looks like a NEGATIVE $110,000 with zero profit and nothing in retained earnings.

For a more personal full service illustration, here is what I am up against in 2024; an additional $379,149 in labor expenses. As a BBQ concept, heavy in protein, my profit margin is 7 percent. This means, if I adjust my menu prices for inflation, but not for the mandated labor increases, in 2024 with static sales, my bottom line is negative $189,149 with zero for retained earnings to get us through that tricky first quarter, so in reality, I need to generate an extra $264,1490 TO BREAK EVEN, with NO profit.

To cover a shortage of $264,149.00 … make that $364,000 ($80,000 retained earnings and $20,000 profit), we can raise prices. Here’s where an additional math problem comes into play: an elementary economic model known as Price Elasticity of Demand. This measure gives the percentage change in quantity demanded in response to a one percent change in price, and restaurant meals have a -2.3 elasticity value. In basic terms, I will lose 2.3 percent of the quantity of meals I serve for every 1 percent I raise my prices. So, how’s that 20-30-40 percent price increase looking now?

Another math conundrum is why servers would prefer $12 per hour in 2024 over maintaining the level of tips and compensation they are currently enjoying, (a voluntary poll on Restaurant Workers of Maine Facebook page last week of 50 servers across Maine averaged $33.44 per hour in tips alone) — oh wait, the servers don’t want that, they want the tip credit reinstated. They want to keep their jobs and they want out of state lobbying money to leave their lucrative jobs alone.

In 2024, if the tip credit is not reinstated, my full-service restaurants will see labor at 49 percent, putting total expenses at 129 percent of sales in one of the most elastic, economic-demand industries there is. No restaurant can continually operate at a loss. The prospect of cutting jobs and automating or raising prices by 40 percent are not good answers, but reinstating the tip credit is.

Wendyll Caisse is the owner of Buck’s Naked BBQ and a Freeport resident.

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