Happy Birthday, GOP Tax Law. More Workers Might Become Contractors Because Of You.

Experts fear the law's incentives will leave fewer workers with basic job protections.
President Donald Trump signed the Tax Cuts and Jobs Act a year ago this week. It includes an incentive for workers to take contractor jobs.
President Donald Trump signed the Tax Cuts and Jobs Act a year ago this week. It includes an incentive for workers to take contractor jobs.
Chip Somodevilla via Getty Images

The GOP tax law passed last year could hasten a workplace trend away from direct employment and toward the use of independent contractors, an arrangement that may save businesses money but would shortchange everyday workers in unseen ways.

That’s the takeaway from a new paper by the Center on Budget and Policy Priorities, a progressive think tank that’s been critical of the Republican tax overhaul. Researchers there say the Tax Cuts and Jobs Act, which President Donald Trump signed a year ago this week, gives workers an incentive to take contractor jobs that forgo basic labor protections and drive down wages in blue-collar fields like trucking and janitorial services.

The White House has argued that by cutting corporate taxes and making it easier for firms to write off expenses, the law encourages companies to make capital investments that will eventually boost wages. White House economic adviser Kevin Hassett has said it will take ”three to five years for workers to see the full benefit, which he controversially claimed could amount to a $4,000-per-worker raise.

But some workers might ultimately be hurt by the law’s tax break on what’s known as pass-through income ― income that tax filers report on their individual returns after they earn it through a partnership, S-corp or sole proprietorship. Such money used to be taxed at the same rate as normal wages earned through a traditional job. But now independent contractors ― who are technically business owners ― can deduct 20 percent of qualifying pass-through income, thereby cutting their effective tax rate.

Those savings could make it easier for companies to sell workers on independent contractor arrangements, a possibility that concerns labor and tax experts.

“As far as we can tell, lawmakers didn’t even consider this outcome,” said Chye-Ching Huang, director of federal fiscal policy at the CBPP, noting that no public hearings were held on the tax bill before it was passed. “It’s hard to get a tangible grip on it. But the fact that we’ve seen this trend [of using independent contractors] already emerging ... it does make us think it’s a reasonable concern that this will add fuel to a long-burning fire.”

How much the contract workforce has grown in recent years is a matter of hot debate. Some experts have found that it has spread dramatically, while others believe the growth has been negligible. What most experts agree on, however, is that contract work comes with plenty of drawbacks that workers may not recognize.

HUFFPOST READERS: Did you wind up as a contractor after having been an employee for most of your career? Tell us about it.

According to the CBPP, more companies may be tempted to use the contractor model going forward ― and more workers may be willing to accept the arrangement ― since the tax break would allow companies to pay workers less while assuring them the same after-tax income.

The paper did not estimate how many workers might move from being employees to contractors, since the tax law is still young and any projection would be speculation.

“As far as we can tell, lawmakers didn’t even consider this outcome.”

- Chye-Ching Huang, Center on Budget and Policy Priorities

So if a worker’s after-tax income is the same, then what’s the big deal if their employee status changes?

Independent contractors, such as Uber drivers, technically work for themselves, not the companies that benefit from their labor. That means they don’t receive a lot of the basic workplace protections other workers take for granted, like a minimum wage, time-and-a-half for overtime or the clear right to join a union. They are less likely to receive standard benefits like health care coverage or a 401(k) plan.

And unlike traditional employees, contractors are responsible for paying both sides of the payroll tax for Social Security and Medicare ― the employer’s end as well as the worker’s. They often bear other costs as well, as in the case of Uber drivers, who have to supply their own car and pay for their own gas. Many workers don’t understand all the downsides when they agree to work under contract.

But there are plenty of benefits to the arrangement for employers. By keeping formal employees off their books, they not only avoid payroll taxes but can reduce costs related to unemployment insurance and workers’ compensation. Contractor agreements can also help companies looking to avoid union organizing drives, since federal collective bargaining law doesn’t cover independent contractors.

Those advantages for corporations explain why many have chosen to use contractors instead of traditional workers. The author and academic David Weil, a labor official in the Barack Obama administration, coined a term for the phenomenon: the “fissured workplace.” Weil and other researchers have documented how the use of contractors to save costs has blurred the lines of corporate accountability, often leading to lower wages and higher injury rates for rank-and-file workers.

Modern home delivery offers a perfect example of the trend. As a 2014 HuffPost story detailed, many of the drivers delivering Amazon packages work as independent contractors tied to little-known courier companies like Lasership. Many of the workers have to buy their own vans in order to do their deliveries, and they can lose their routes or see their take-home pay cut at the whims of the company. “It’s like they want us to be employees, but they don’t want to pay for it,” one driver explained.

Dean Baker, an economist at the left-leaning Center for Economic and Policy Research, said he agrees with the CBPP hypothesis that the enticements baked into the tax law will probably lead to more contracting.

“Absolutely, you give incentives for people to be independent contractors rather than employees, you will see more people be independent contractors,” Baker said via email. “I don’t have a good sense of how many will go this route, but it is classic bad tax policy. You don’t want to encourage people to change their employment relationship just to save on their taxes.”

The benefits of the tax law probably aren’t great enough to urge workers to become independent contractors, but it might make them more willing to tolerate its drawbacks, said Françoise Carré, research director at the Center for Social Policy at the University of Massachusetts Boston. Carré has studied the use of independent contractors and believes employers already have plenty of reasons to use the model.

The new pass-through provision “would only be one of the factors,” Carré said, and perhaps a limited one.

“You give incentives for people to be independent contractors rather than employees, you will see more people be independent contractors.”

- Dean Baker, economist

The new tax law includes a number of “guardrails” aimed at preventing workers from becoming independent contractors just to nab the new savings on pass-through income. The IRS proposed regulations in August designed to stop companies from classifying former employees as contractors, for example.

Nicole Hager, a spokeswoman for the Senate Finance Committee, which drafted much of the law, said lawmakers did anticipate the potential for abuse.

“Tax reform included safeguards to prevent people from gaming the system by re-characterizing personal income as business income in order to use the pass-through deduction,” Hager said.

Brendan Duke, a tax analyst at the CBPP, said the guardrails probably won’t be enough to prevent former employees from becoming contractors when workers move to different jobs over time. Another rule forbids people in certain industries from claiming the deduction if they make over $157,500. But most workers earn well below that so wouldn’t be affected by the regulation.

Duke said in most cases all the old incentives to using contractors still apply. Now it’s just an easier case for employers to make to workers.

“They can say, ’Here’s this independent contractor job. It comes without health care, sure. But look, there’s this tax deduction.”

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