There are many reforms necessary to help strengthen workers’ ability to join unions and rebalance power in the U.S. economy—such as passing the Protecting the Right to Organize Act1 and the Public Sector Freedom to Negotiate Act2—as well as ensuring that all government spending creates good union jobs. Congress should not forget the tax code as it pursues these pro-worker reforms.
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.
- Protecting the Right to Organize Act of 2021, H.R. 842, 117th Congress, 1st sess. (February 4, 2021), available at https://www.congress.gov/bill/117th-congress/house-bill/842. ↩
- Public Service Freedom to Negotiate Act of 2019, H.R. 3462, 116th Congress, 1st sess. (June 25, 2019), available at https://www.congress.gov/bill/116th-congress/house-bill/3463. ↩
- David Madland and Malkie Wall, “3 Pro-Union Reforms to Improve Tax Fairness for American Workers” (Washington: Center for American Progress Action Fund, 2020), available at https://www.americanprogressaction.org/issues/economy/reports/2020/09/02/178565/3-pro-union-reforms-improve-tax-fairness-american-workers/. ↩
- Erling Barth, Alex Bryson, and Harald Dale-Olsen, “Union Density Effects on Productivity and Wages,” The Economic Journal 130 (631) (2020): 1898–1936, available at https://academic.oup.com/ej/article/130/631/1898/5824627. ↩
- Note that there has been a temporary exception during the COVID-19 pandemic where, for a period, misclassified workers have been able to access unemployment insurance, thanks to the CARES Act. ↩
- Françoise Carré, “(In)dependent Contractor Misclassification,” (Washington: Economic Policy Institute, 2015), available at https://www.epi.org/publication/independent-contractor-misclassification/; Catherine Ruckelshaus and Ceilidh Gao, “Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries,” (Washington: National Employment Law Project, 2017), available at https://www.nelp.org/publication/independent-contractor-misclassification-imposes-huge-costs-on-workers-and-federal-and-state-treasuries-update-2017/. ↩
- Businesses that misclassify workers as independent contractors instead of employees may face back taxes and penalties. However, Section 530 provides relief to employers who acted in good faith from federal employment tax obligations. In order to be eligible for safe harbor, employers have to meet three statutory requirements: 1) reporting consistency, i.e. “the taxpayer must have timely filed the requisite information returns consistent with its treatment of the worker as a non-employee”; 2) substantive consistency, i.e. “if the taxpayer or predecessor treated the worker, or any worker holding a substantially similar position, as an employee at any time after December 31, 1977, the taxpayer will not be eligible for relief”; and 3) reasonable basis, i.e. “the taxpayer must have relied on one of the following for purposes of treating the worker as a non-employee: 1) prior audit; 2) judicial precedent; 3) industry practice; or 4) other reasonable basis.” See, IRS, “Work Reclassification – Section 530 Relief,” available at https://www.irs.gov/government-entities/worker-reclassification-section-530-relief (accessed June 2021). ↩
- U.S. Department of Treasury, “General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals,” (Washington: 2016), available at https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf, pg. 207. ↩
- See provision to “increase certainty with respect to worker classification,” in Joint Committee on Taxation, “Estimated Budget Effects of the Revenue Provisions Contained in the President’s Fiscal Year 2017 Budget Proposal” (Washington: 2016), available at https://www.jct.gov/publications.html?func=startdown&id=4902; and U.S. Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals.” ↩
- Including passage of the PRO Act, which tightens the definition of independent contractors. See, Protecting the Right to Organize Act of 2021. ↩
- Both the Fair Playing Field Act of 2015 and Section 3511 of Taxpayer Responsibility, Accountability, and Consistency Act of 2009 would have terminated Section 530. See Fair Playing Field Act of 2015, S. 2252, 114th Cong., 1st sess. (November 5, 2015), available at https://www.congress.gov/bill/114th-congress/senate-bill/2252/text; Taxpayer Responsibility, Accountability, and Consistency Act of 2009, S. 2882, 111th Cong., 1st sess. (December 15, 2009), available at https://www.congress.gov/bill/111th-congress/senate-bill/2882/text. President Barack Obama also proposed the change in his 2012, 2013, 2014, 2015, and 2016 budget proposals. See Françoise Carré, “(In)dependent Contractor Misclassification” (Washington: Economic Policy Institute, 2015), available at https://www.epi.org/publication/independent-contractor-misclassification/; and Office of Management and Budget, “Budget of the U.S. Government: Fiscal Year 2017,” available at https://www.govinfo.gov/content/pkg/BUDGET-2017-BUD/pdf/BUDGET-2017-BUD.pdf. Trump’s FY 2017 budget proposal also included provisions to address the issue of misclassification. See page 207 of U.S. Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals.” A 2018 report by the Treasury Inspector General for Tax Administration recommended a legislative change to section 530 allowing the IRS to, at minimum, “take prospective action to enforce the law on employers who incorrectly treat workers as independent contractors.” U.S. Treasury Inspector General for Tax Administration, “Improvements to the SS-8 Program Are Needed to Help Workers and Improve Employment Tax Compliance” (Washington: 2018), available at https://www.treasury.gov/tigta/auditreports/2018reports/201830077fr.pdf. ↩
- The National Labor Relations Act (NLRA) states that it is the “policy” of the United States to eliminate obstructions to the free flow of commerce, “by encouraging the practice and procedure of collective bargaining and by protecting the exercise by workers of full freedom of association, self- organization, and designation of representatives of their own choosing, for the purpose of negotiating the terms and conditions of their employment or other mutual aid or protection.” See U.S. Code §§ 151-169. ↩
- This is an extrapolation of earlier estimates by the author that prohibiting deductions for expenditures on anti-union consultants would, at current tax rates, increase revenues by roughly $71 million per year. David Madland and Malkie Wall, “3 Pro-Union Reforms to Improve Tax Fairness for American Workers,” (Washington: Center for American Progress Action Fund, 2020), available at https://www.americanprogressaction.org/issues/economy/reports/2020/09/02/178565/3-pro-union-reforms-improve-tax-fairness-american-workers/. ↩
- Karla Walter and David Madland, “American Workers Need Unions: 3 Steps to Strengthen the Federal Labor Law System,” (Washington: Center for American Progress Action Fund, 2019), available at https://www.americanprogressaction.org/issues/economy/reports/2019/04/02/173622/american-workers-need-unions/; David Madland and Malkie Wall, “The Middle Class Continues to Struggle as Union Density Remains Low,” (Washington: Center for American Progress Action Fund, 2019), available at https://www.americanprogressaction.org/issues/economy/news/2019/09/10/175024/middle-class-continues-struggle-union-density-remains-low/. ↩
- David Madland and Nick Bunker, “Unions Make Democracy Work for the Middle Class,” (Washington: Center for American Progress Action Fund, 2012), available at https://www.americanprogressaction.org/issues/economy/reports/2012/01/25/10913/unions-make-democracy-work-for-the-middle-class/ . ↩