In a move aimed at providing relief to millions of service industry workers, President Donald Trump's tax-cut legislation signed last year has exempted most tipped income up to $25,000 from federal taxes for the filing years 2025 through 2028. This change, which applies to workers such as servers, bartenders, and delivery drivers, is designed to encourage accurate reporting of earnings and boost take-home pay for those reliant on gratuities. However, the benefits are uneven across the country, as more than half of U.S. states continue to impose their own taxes on tips, prompting criticism from advocates who argue that state-level policies undermine the federal initiative.
Andrew Bracy, outreach operations director at the Foundation for Government Accountability and a former server at a Maine hotel from 2014 to 2022, shared his personal experience in an opinion piece published on Fox News. Bracy described the unpredictability of tip-based income, noting that some nights he earned $200 or $300, while others brought in half that amount or less. The COVID-19 pandemic exacerbated the challenges, he wrote, with indoor dining restricted to just six outdoor tents at his workplace, leading to fewer customers and difficulty covering bills. During that period, Bracy got married to a coworker and started a family, heightening the pressure to bring home steady earnings.
Bracy highlighted the annual dilemma faced by tipped workers: whether to report all tip income on federal tax returns. He always chose to comply with the law, but acknowledged the temptation, especially for those starting careers or supporting young families. According to Census Bureau estimates cited by Bracy, about a third of tipped income—roughly $8 billion annually—went unreported between 2005 and 2018. The new federal exemption, Bracy argued, reduces the incentive to underreport by allowing workers to keep more of their earnings legally, potentially improving access to credit for major purchases like cars or homes.
Despite the federal progress, state taxation remains a hurdle. Just over half of states levy taxes on tips, and Bracy called for all states to align with the federal policy. Seven states automatically conform to federal tax changes, meaning their policies adjusted without further action when the tip exemption took effect. Among proactive states, Michigan stands out: Democratic Gov. Gretchen Whitmer signed a no-tax-on-tips law in October, a move Bracy described as "refreshing" given her party's affiliation and her potential ambitions for higher office.
In contrast, several Democratic-led states have resisted similar measures. Maine Gov. Janet Mills, a Democrat, recently urged the state legislature to conform to most provisions of the federal tax-cut law but explicitly excluded the tip exemption. According to Bracy, this decision would cost Maine an estimated $9.2 million in annual revenue—a relatively small amount compared to the state's $14.5 billion annual budget. Mills' office has not publicly commented on the exclusion, but Bracy contended that the fiscal impact is minor for the state while significant for workers, who lose dollars needed for family expenses.
Arizona provides another example of pushback. In January, Democratic Gov. Katie Hobbs vetoed a bill that would have aligned state policy with the federal exemption. Hobbs announced the veto surrounded by signs reading "middle class tax cuts now," a juxtaposition Bracy called bizarre given the bill's intent to reduce taxes for tipped workers. Arizona Republicans had pushed the legislation as a direct response to the federal change, but Hobbs cited concerns over budget implications and equity in taxation, according to state reports.
In Wisconsin, the situation remains unresolved. Republicans in the state legislature sent a conforming bill to Democratic Gov. Tony Evers shortly after the new year. Evers has not indicated his intentions, but Bracy suggested a veto is likely based on Evers' history of opposing Republican-backed measures. Wisconsin's tipped workers, many in the tourism and hospitality sectors around Milwaukee and Madison, could see varied impacts depending on the outcome, with advocates urging swift action amid ongoing economic pressures from inflation and reduced consumer spending.
The federal tip tax exemption stems from provisions in the tax-cut bill Trump signed in late 2023, which the Treasury Department has outlined as applying to jobs in restaurants, hotels, and other service roles. Treasury officials revealed details in early 2024, specifying that the break covers tips up to the $25,000 threshold, though workers must still report income for Social Security and Medicare purposes. This partial relief addresses long-standing complaints from the service industry, where tips often constitute the bulk of earnings—sometimes exceeding base wages, which federal law allows to be as low as $2.13 per hour.
Background on tipped worker taxation reveals a patchwork system. The federal government has historically required reporting of tips over $20 per month, but enforcement has been lax, contributing to the unreported income figures Bracy referenced. States like California and New York, which do not automatically conform to federal changes, continue full taxation, while others like Florida and Texas impose no state income tax at all, effectively exempting tips by default. The divergence has fueled debates in statehouses, with labor unions sometimes opposing exemptions over fears of reduced contributions to public programs.
Rep. James Comer, R-Ky., touched on related issues during a recent appearance on Fox News' "The Ingraham Angle," where he grilled Minnesota Gov. Tim Walz over allegations of fraud in his state. While not directly addressing tip taxes, Comer's comments underscored broader Republican critiques of Democratic governance on economic matters, including taxation and worker relief. Walz's administration has not signaled plans to eliminate state taxes on tips, aligning with patterns in other blue states.
Advocates for tipped workers emphasize the human element. Bracy, reflecting on his time as a server, noted that the job's instability—coupled with family responsibilities—made every dollar critical. He wrote, "Every dollar they pay to Augusta is a dollar they can’t spend on their families and futures," referring to Maine's capital. Similar sentiments echo from industry groups like the National Restaurant Association, which has lobbied for uniform exemptions to simplify compliance and support post-pandemic recovery in hospitality.
The broader implications of state-federal misalignment extend to economic equity. With inflation lingering and consumer spending slowing, tipped workers in non-conforming states face higher effective tax burdens, potentially discouraging workforce participation in key sectors. Economists estimate that full alignment could inject billions into local economies through increased disposable income, though critics argue it might strain state budgets for education and infrastructure. In Michigan, Whitmer's action has been praised by business leaders, with one restaurant owner in Detroit telling local media it would help retain staff amid labor shortages.
Looking ahead, the fate of tip tax policies will likely play out in state legislatures during 2024 sessions. In Maine, the legislature is set to debate Mills' conformity proposal, with tipped worker advocates planning testimony. Arizona lawmakers may attempt to override Hobbs' veto, though success is uncertain given the Democratic governor's influence. Wisconsin's bill hangs in the balance, potentially becoming a flashpoint in Evers' reelection bid. Nationally, the issue could resurface in congressional discussions if Trump's policies face challenges from a new administration.
President Trump touted the tip exemption as a cornerstone of his pro-worker agenda during the bill's signing ceremony in Washington, D.C., on December 20, 2023. "This is for the hardworking Americans who serve us every day," he said, according to White House transcripts. Yet, as states like Maine, Arizona, and Wisconsin deliberate, the promise of relief remains incomplete for many. Bracy concluded his piece by urging governors and lawmakers of both parties to "see the light," arguing that ending taxes on tips would aid millions grappling with economic headwinds.
For now, tipped workers in conforming states enjoy the full federal benefit, while others navigate a fragmented landscape. As Bracy put it, "President Trump has done his part to deliver for tipped workers. Now state leaders should stop stiffing them." The ongoing debate highlights tensions between federal innovation and state autonomy, with real stakes for the roughly 4 million Americans in tip-dependent jobs.