Imagine this: you’ve just finished a double shift waiting tables during the holiday rush. Your feet aching, apron stained, and you finally count your tips — only to remember that a big chunk is about to disappear into taxes. That used to be normal. Not anymore… unless you happen to live in certain states.
Last summer President Trump turned one of his most popular campaign promises into reality. On July 4th he signed the One Big Beautiful Bill Act, officially ending federal income tax on tips and overtime pay for millions of service and hourly workers. It was supposed to be a straightforward win for the little guy. Turns out, it’s not that simple.
A Federal Victory Meets State-Level Resistance
The new law is crystal clear at the federal level: tips earned by restaurant workers, bartenders, hair stylists, delivery drivers — anyone in the service industry — are no longer subject to federal income tax. The same goes for overtime hours worked by factory employees, linemen, nurses, and countless others who regularly put in extra time. Treasury officials called it the most pro-worker tax cut in decades.
But here’s where things get messy. While the federal government can’t tax those earnings anymore, states can — and several Democratic-led states have decided they’re not playing along.
In New York, Illinois, Colorado, and a handful of others, governors and state legislatures have made it clear they intend to keep taxing tips and overtime exactly as before. That means a waiter in Manhattan or a nurse pulling overtime in Chicago could still see 5-10% of their hard-earned extra money vanish to state coffers, even though Uncle Sam is finally leaving it alone.
What the Treasury Secretary Had to Say
“This partisan stonewalling is a direct assault on the very families and workers liberal politicians claim to champion.”
Treasury Secretary Scott Bessent
Secretary Bessent didn’t hold back. He accused the holdout governors of “deliberately blocking their own residents” from receiving benefits they’re entitled to under federal law. He even took the fight to social media, comparing the governors to the Grinch stealing Christmas from service workers and seniors.
It was a sharp message, and it landed. Within hours the post racked up millions of views, with workers from Las Vegas to Miami thanking the administration and asking why their own states couldn’t get on board.
Why Are States Allowed to Do This?
Most people assume that when the federal government cuts a tax, everyone benefits immediately. Not quite. Income taxes exist at two levels in America — federal and state — and they’re separate systems. When Congress and the President eliminate a federal tax, states aren’t automatically required to follow unless their own laws are written to mirror federal rules.
Many red and purple states — think Florida, Texas, Nevada, Pennsylvania — quickly conformed their tax codes or simply don’t have an income tax to begin with. Workers there started keeping 100% of their tips the moment the bill was signed.
Blue states with high income taxes took a different path. Lawmakers in Albany, Springfield, and Denver argue that changing their tax code would blow massive holes in budgets already strained by pension obligations, Medicaid expansion, and ambitious climate programs. In plain English: they say they can’t afford to let the money go.
The Numbers Tell a Brutal Story
Let’s put real dollars to it.
- A full-time server earning $35,000 in salary + $25,000 in tips used to owe roughly $5,500 in federal tax on those tips (22% bracket).
- Under the new law that federal bill disappears — an instant $458 monthly raise.
- In New York, that same worker still owes about $1,650 in state tax on tips (6.6% effective rate).
- Illinois takes another $1,250 (4.95%).
- Colorado grabs roughly $1,150 (4.55%).
Add it up and workers in those states are still losing thousands every year that their counterparts in conforming states get to keep. For many families living paycheck to paycheck, that difference is rent, groceries, or Christmas presents.
The Irony Runs Deep
Here’s the part that still makes me shake my head. Just over a year ago, during the 2024 campaign, Vice President Kamala Harris stood on a stage in Las Vegas and promised the exact same thing: no taxes on tips for service workers. She got loud applause from the culinary union crowd, and Nevada’s Democratic senators backed her up.
Trump called it out immediately as a copycat move — and then he actually delivered. Now the roles are reversed: a Republican administration is fighting to put extra money in servers’ pockets while several Democratic governors are the ones saying “not in my state.” Politics really does make strange bedfellows.
Will There Be Consequences?
The Treasury Department isn’t staying quiet. Officials have hinted that states refusing to conform could face indirect pressure — everything from public shaming campaigns to potential loss of certain federal grants tied to tax administration priorities.
More importantly, workers are starting to notice. Restaurant associations in New York and Illinois report members asking whether they should relocate to neighboring states that do conform. One viral TikTok from a Denver bartender announcing she was moving to Arizona because “I’ll make the same in tips but keep thousands more — racked up 4 million views in a week.
When labor starts voting with its feet, politicians usually pay attention.
What Happens Next?
Legislative sessions begin in January. Pressure is already building on holdout governors to at least phase in conformity over a few years. Some Democratic lawmakers in competitive districts have broken ranks and introduced bills to align state law with the federal change.
Whether budget hawks or worker advocates win out remains to be seen. But one thing feels certain: the “No Tax on Tips” fight has become a litmus test for who actually cares about putting money back in the pockets of regular Americans — and who’s just performing when the cameras are on.
For the waitress counting tips after a late shift, the factory worker cashing an overtime check, or the hair stylist hoping to pay down holiday debt, the politics probably matter less than the bottom line. They just want to keep what they earned.
And honestly? After the year we’ve all had, who can blame them.
