Pro-union tax reforms3 could not only help support unions by boosting membership,4 two specifically would also raise revenue. Specifically, Congress can help raise funds that could be used to offset some of the costs of the investments in the American Jobs Plan or American Families Plan by:
- Changing tax law to reduce misclassification of employees as independent contractors
- Imposing limits on corporate deductions of business expenses that are anti-labor
These reforms would help workers and their unions and thus help address some of the major economic problems facing the country such as stagnant wages and near record levels of economic inequality. They would also benefit taxpayers who would no longer be forced to subsidize anti-union activities.
Change the tax law to reduce misclassification of employees as independent contractors
When employers misclassify their employees as independent contractors, workers lose their legal rights to receive overtime pay, unemployment insurance,5 as well as workers’ compensation, and federal, state and local governments lose billions in unpaid tax revenues.6 Workers also lose their right to join a union and bargain collectively because the National Labor Relations Act (NLRA) excludes independent contractors. Unfortunately, the tax code facilitates misclassification.
Section 530 of the Revenue Act of 1978—known as the Safe Harbor Rule—allows companies to continue misclassifying workers as independent contractors even if the IRS determines they are employees and also prevents the IRS from assessing back taxes on those employers.7 Repealing Section 530 would allow the IRS to require prospective reclassification of workers who are currently misclassified and allow the U.S. Department of Treasury and the IRS to issue generally applicable guidance on the proper classification of workers.8 In 2016, the Joint Committee on Taxation estimated that a related proposal would raise nearly $11 billion in revenue over 10 years.9
While many different strategies are required to fully address the problem of misclassification,10 repealing the safe harbor rule is a critical step forward and would raise significant revenue while supporting workers and their unions. Policymakers have attempted to close this loophole on numerous occasions in the past, and there continues to be interest in doing so.11
Impose limits on corporate deductions of business expenses that are anti-labor
Similarly, current tax law allows companies to deduct money spent on anti-union campaigns—such as hiring anti-union consultants to design workplace gatherings that management uses to criticize unions and intimidate workers—as ordinary and necessary business expenses. Taxpayers shouldn’t have to subsidize anti-union activities by employers.
Policymakers should ensure that funds spent opposing union organizing are not deductible as an ordinary business expense, especially because the express purpose of the NLRA is to encourage collective bargaining.12 For example, lawmakers should prohibit deductions for spending on anti-union consultants as well as money for in-house lawyers that do work similar to anti-union consultants. They could potentially also prohibit the deduction of expenses incurred in recruiting and retaining permanent striker replacements or expenses incurred in defending unfair labor practices that are found to have violated the NLRA. Estimates suggest that preventing deductions for expenditures on anti-union consultants would increase revenues by roughly $700 million over 10 years and, potentially, significantly more.13
These two pro-union tax reforms would be important steps towards increasing the number of workers with access to unions and collective bargaining and, thus, would help raise wages, reduce the racial wealth gap, close gender pay gaps, shrink economic inequality, and make workplaces safer.14 It would also help make America’s democracy function better by encouraging more workers—particularly those with less education—to vote and participate in politics and by ensuring workers have a strong behind-the-scenes voice to balance out the power of corporations and the wealthy.15 On top of that, they would also raise revenue that could be used to help rebuild the U.S. economy in the wake of the COVID-19 pandemic. These tax reforms would prevent corporations from engaging in anti-worker behavior at taxpayers’ expense and would raise a modest amount of revenue in a way that would truly help the nation.
David Madland is a senior fellow and the senior adviser to the American Worker Project at the Center for American Progress Action Fund.