California and New York Reject Federal Tip Tax Exemption

States like California and New York, led by Democratic governance, are reportedly not adhering to the federal “tip tax exemption” introduced by the Trump administration earlier this year. This situation leaves tipped workers still obligated to pay state income taxes on their tips, regardless of the new federal rules.

Specifically, New York Governor Kathy Hochul and state Democratic leaders have chosen not to implement the federal “tipping tax exemption” at the state level. While the tax reforms from 2025 exempt tips from federal income taxes, New York continues to tax this income. Critics argue that this directly contradicts the state’s intention to support service industry workers seeking affordability.

Leon Gallagher, a bartender at the Blasket Irish Pub in Midtown, expressed his frustration, saying that city leaders are neglecting the needs of tipped workers.

“He’s a terrible guy,” Gallagher commented about Hochul. “If tips weren’t taxed, you’d save more, enjoy life a little more, and maybe you wouldn’t have to work extra shifts.”

In California, similar discontent is evident among tipped workers, including waiters and bartenders. Many have raised questions about why Governor Gavin Newsom is opposing initiatives that would alleviate financial pressures on service workers throughout the state.

“If there were no taxes, there would be more money in my pocket,” said Alex Frost, a bartender at Baja Cantina in Marina del Rey. “I don’t understand why they need my money. The reason most people in this industry do this job is because of the tips… If you could deduct even a portion of that, that would help a lot,” he added.

In response, a spokesperson for Newsom remarked on California’s taxation context.

“The majority of Californians pay lower overall taxes than states that tax workers more, like Texas and Florida, while benefiting from a minimum wage that’s over double the mediocre $7.25 per hour from the Trump administration,” stated Newsom’s spokesman, Brandon Richards.

However, this assertion may not hold true. California has the highest income tax rate in the U.S., whereas Texas and Florida do not impose a state income tax. Rising housing costs mean Californians face higher property taxes, along with one of the nation’s steepest sales tax rates—resulting in a higher tax burden through consumer purchases. There’s little evidence to support the claim that most Californians pay less than those in non-tax-exempt states, and merely raising the minimum wage doesn’t remedy these tax disparities.

This federal policy aligns with a significant campaign promise from Donald Trump. It allows qualifying workers to deduct up to $25,000 in qualified tips from taxable income for the years 2025 to 2028, with a phased approach for high-income earners starting at $150,000 for individuals and $300,000 for joint filers.

While this change is expected to reduce overall U.S. income taxes significantly—potentially saving eligible individuals an average of at least $1,800 annually—each state has the autonomy to adjust its tax regulations.

Many states typically calculate their taxable income from federal adjusted gross income but can “uncouple” from specific federal deductions to maintain revenue. California’s Democratic leaders have indicated they will not adopt this deduction, foreseeing an annual revenue loss of about $3.2 billion. State officials argue that these taxes are critical for funding public programs, education, and social services.

Despite claims from some Democrats that raising the minimum wage and enhancing labor protections are adequate means to support tipped workers, discontent continues to rise among service industry employees in blue states where state-level tip taxation remains in effect. Many contend that federal tax breaks would provide more immediate economic relief compared to wage increases, which often get negated by rising consumer prices.

California Republican lawmakers have sought to introduce state-level tip tax exemptions through various proposals, such as Senate Bill 17 that suggested a $20,000 deduction for tips. However, these measures were dismissed by the Democratic majority with minimal discussion.

Tipped employees in California must still report all tips as income on their state tax returns, potentially needing to reconcile federal deductions. The Franchise Tax Board plans to share guidance before the 2026 tax filing season, concerning the requirements for 2025 taxes.