The balance of power in the United States’ economy and democracy is wildly off. Soaring inequality, stagnant wages, scant worker protections, and huge divides across race and gender are symptoms of a system where corporate interests dominate the American economy and political system. The COVID-19 pandemic and the protest movement against systemic racism have thrown this imbalance into stark relief. Now more than ever, workers need a greater voice and policymakers need to support them by passing pro-union legislation.
Unions and collective bargaining can help address many of the socioeconomic issues facing the United States by raising workers’ wages, closing pay gaps, reducing economic inequality, promoting safe workplaces, and increasing workers’ democratic voice.1 Yet the broken labor law system too often impedes the ability of workers to form unions and engage in collective bargaining and needs to be reformed.2
Legal barriers against workers extend well beyond labor policy. For a country that prides itself on the tenacity of its workforce, the U.S. legal code is steeped in rules that hinder workers’ ability to prosper. To see how this is woven into the fabric of the economy, one need look no further than the Internal Revenue Code, which contains several provisions that further tilt power away from unions and toward corporations. For instance, tax law allows businesses to deduct the costs of fighting unions, prevents workers from deducting the costs of joining a union, and facilitates companies that misclassify employees as independent contractors, which denies workers their right to unionize.
Policymakers should reverse the anti-union biases in the tax code and take steps to build power for workers by:
- Imposing limits on corporate deductions of business expenses that are anti-labor
- Creating a new above-the-line deduction for union dues
- Changing tax law to reduce misclassification of employees as independent contractors
These policies are by no means all that is required to strengthen unions and collective bargaining, improve conditions for workers, and make American democracy more responsive to the will of the people—or to even make the tax code fair. Legislation such as the Protecting the Right to Organize (PRO) Act and the Public Service Freedom to Negotiate Act are essential to strengthening worker power, as are reforms that promote sectoral and/or multiemployer bargaining and provide incentives for union membership.3 Similarly, a host of reforms, from raising the minimum wage to implementing automatic voter registration, are also sorely needed to raise standards for workers and encourage democratic participation. Other tax policies that harm workers and indirectly weaken unions, such as those that encourage outsourcing and offshoring, need to be reformed.4 In addition, policymakers must reverse the generally pro-corporate tilt of the Trump administration’s 2017 tax overhaul—known as the Tax Cuts and Jobs Act (TJCA)—which provided massive tax cuts for corporations and created new deductions for pass-through businesses, mostly to the benefit of wealthy owners rather than workers.5 Future tax legislation must also take steps to address income inequality, restore greater tax progressivity, and generate needed revenues to pay for public services.
Still, these pro-union tax reforms would be an important step forward in increasing the number of workers with access to unions and collective bargaining and should be part of any effort to create a more progressive tax framework. Unions and collective bargaining are vital to addressing many of America’s core problems. Unions raise wages, reduce the racial wealth gap, close gender pay gaps, shrink economic inequality, and make workplaces safer.6 Just as importantly, they help balance political power so that democracy can function properly by increasing voter turnout from people of modest means and advocating for policies that the public supports.7 Finally, unions help ensure that other policies are effectively implemented and enforced.8 Other types of pro-worker or pro-democracy reforms cannot substitute for all that unions do. Thus, pro-union tax policy is critical to addressing some of the most fundamental problems the country faces and should be part of future tax reform efforts.
Recommendations for pro-labor tax reforms
1. Prevent employers from claiming tax deductions for anti-labor expenses
Employers use a range of tactics to prevent workers from organizing a union and collectively bargaining.9 Some of these tactics—such as firing or discriminating against employees because of union activity—are illegal under federal labor law.10 However, the National Labor Relations Act (NLRA), which grants workers the right to form or join a union, leaves workers vulnerable to several other types of coercive conduct. For example, many employers require workers to attend “captive audience meetings”—workplace gatherings used by management to communicate anti-union views—and to prevent union organizers from communicating with workers at their worksites. In addition, the Economic Policy Institute (EPI) recently found that employers spend roughly $340 million a year on union avoidance consultants whose purpose is to fend off union organizing campaigns.11
Current tax law allows companies to deduct ordinary and necessary business expenses, which includes money spent on anti-union campaigns. In effect, the tax code rewards companies for thwarting workers’ labor rights. Although companies may have the legal authority to engage in anti-union campaigns, there is no public policy justification for having taxpayers subsidize such conduct, especially when you consider that the express purpose of the NLRA is to encourage collective bargaining.12
Lawmakers should rectify the imbalance by ensuring that money spent on opposing union organizing is not deductible as an ordinary business expense.13 For example, lawmakers could prohibit deductions for spending on anti-union consultants as well as money for in-house lawyers that do work similar to that of anti-union consultants. They also could potentially prohibit the deduction of expenses incurred in recruiting and retaining permanent strike replacements; certain expenses related to office email systems, unless the employer allows workers to use their email system for union and protected concerted activity; or expenses incurred in defending unfair labor practices that are found to have violated the NLRA or in negotiating a first contract, unless the employer has agreed to submit to binding arbitration in the event that the parties are unable to promptly reach agreement.
The authors estimate that a pared-down policy prohibiting deductions for expenditures on anti-union consultants would increase revenues by roughly $71 million per year—and potentially significantly more. As mentioned above, the EPI estimates that companies spend roughly $340 million on anti-union consultants every year.14 U.S. corporations have a marginal tax rate of 21 percent.15 Multiplying $340 million by the marginal tax rate suggests that the maximum corporate tax savings for hiring anti-union consultants today are slightly more than $71 million. With a higher corporate rate, savings would be even higher. This proposal could also prohibit deducting the costs of other anti-union activities outlined above and therefore lead to an even larger increase in tax revenues.
2. Create an above-the-line deduction for union dues
Lawmakers could also create an above-the-line deduction for union dues. Such a deduction would increase tax fairness while also lowering the cost of joining a union, according to Alexandra Thornton, senior director of Tax Policy at the Center for American Progress.16
In tax policy, there is a well-understood principle that taxpayers should be able to deduct the costs of earning that income. For example, tax laws allow companies to deduct ordinary and necessary business expenses. Similarly, the pre-TCJA tax code allowed workers to deduct unreimbursed business expenses, such as union dues and business travel costs, subject to certain limits explained below. However, the TCJA eliminated the deduction for unreimbursed employee expenses.17 As a result, workers and their unions are now entirely excluded from standard tax benefits, even as those benefits are still being extended to corporations.
Prior to the TCJA, union dues were deductible, but only some workers actually deducted them because individuals could only deduct the portion of such expenses exceeding 2 percent of their income—and only if they did not claim the standard deduction. In other words, it was a below-the-line, itemized deduction. In comparison, an above-the-line deduction would improve on the pre-TCJA framework by allowing taxpayers to deduct all union dues regardless of whether they chose the standard deduction or itemized deductions. This type of deduction would allow union members to deduct the costs of earning their income and result in the tax code more accurately measuring individuals’ ability to pay. Policymakers have recognized this need for greater tax fairness: For instance, Sen. Bob Casey (D-PA) and Rep. Conor Lamb (D-PA) have put forward legislation that would make union deductions above-the-line.18 CAP estimates that in 2018, an above-the-line federal tax deduction for union dues would have reduced revenues by roughly $1 billion—a relatively modest sum compared to many existing tax expenditures for business, which can range from tens to hundreds of billions of dollars per year.19
3. Reduce misclassification of employees as independent contractors
When employers misclassify their employees as independent contractors, workers and taxpayers lose out. Misclassification robs workers of their right to collectively bargain and denies them access to overtime pay, unemployment insurance, and workers’ compensation.20 It also costs local, state, and federal governments billions in unpaid tax revenues.21 Unfortunately, employee misclassification is a persistent issue in today’s economy, especially in some of the fastest-growing industries—such as home care, hospitality, and trucking, to name just a few.22
Many different strategies are required to fully address the problem,23 some of which can be undertaken through tax reforms. One important step to help address misclassification and therefore ensure that more workers can legally join unions would be to repeal Section 530 of the Revenue Act of 1978—known as the “safe harbor” rule. The provision allows companies to continue misclassifying workers as independent contractors even if the IRS determines they are employees; and it also prevents the IRS from assessing back taxes on those employers.24 Repealing Section 530 would allow the IRS to require prospective reclassification of workers who are currently misclassified and would allow the U.S. Department of the Treasury and the IRS to issue generally applicable guidance on the proper classification of workers.25 In 2016, the Joint Committee on Taxation estimated that a related proposal would raise nearly $11 billion in revenue over 10 years.26 Several policymakers, including Sen. Sherrod Brown (D-OH), have attempted to close this loophole on numerous occasions in the past, and there continues to be interest in doing so.27
A related option for addressing misclassification in the tax code would be to amend the definition of “employee” under Section 3121 of the Internal Revenue Code of 1986. The revised definition of employee could, for example, resemble the “ABC test” established by A.B. 5 in the state of California. Under the ABC test, a worker is considered an employee—rather than an independent contractor—unless the individual is a) free from the control and direction of the hiring entity; b) performs services that are outside the usual course of business; and c) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the services performed.28
Workers need access to the collective bargaining process in order to build power in the United States economy and democracy, so that wages and benefits can rise and politicians will be more responsive to the desires of regular citizens. This country’s current tax policy creates unnecessary roadblocks for hardworking Americans, but straightforward pro-worker tax reforms can move the needle in the right direction. Tax reforms that make it easier for workers to unionize and harder for employers to stymy their rights would be a step toward a more equitable tax system for both workers and the public.
David Madland is a senior fellow and the senior adviser to the American Worker Project at the Center for American Progress Action Fund. Malkie Wall is a research associate for Economic Policy at the Action Fund.