WASHINGTON — President Trump’s “One Big Beautiful Bill” aims to enhance workers’ pay by removing federal taxes on tips, overtime, and other income. However, many states led by Democrats are opting to continue taxing these earnings.
This inconsistency across states creates a complex tax landscape, impacting waitstaff, bartenders, retirees, and hourly employees differently, depending on where they live.
A recent analysis highlighted states where residents face challenges in fully benefiting from the new tax provisions. Connecticut, Minnesota, New Mexico, Rhode Island, and Vermont are significant culprits. These places still tax major income sources that the President’s law, enacted on July 4, 2025, sought to eliminate.
These states not only maintain high income taxes on earnings, which the federal government aimed to exempt, but also decline to participate in the education freedom tax credit program established by the legislation.
Conversely, states like New York adopt a mixed strategy, aligning with some federal tax cuts while dismissing others.
Tax on Tips
Currently, 31 states and Washington, D.C., still impose taxes on tips.
Workers in states that choose not to accept the federal deduction can see as much as 10% of their tips taxed. For instance, Minnesota has a “progressive personal income tax,” with rates between 5.35% and 9.85%.
If a server in Minnesota earns $70,000 a year—$25,000 of which is from tips—he or she is taxed at a 6.8% rate. As a result, the server could lose approximately $1,700 in tips due to the state’s noncompliance with federal tax breaks.
Restaurant associations in states like New Mexico express frustration over persistent tip taxation, particularly when their economies benefit from oil and gas revenues. A representative noted that this taxation contradicts the needs of service workers and highlights an area where tax relief is needed.
“Under the Democratic leadership, New Mexico has been poorly managed, with rising state spending and taxes while taxpayers see minimal returns,” added Mike Nelson, Interim Chairman of the New Mexico Republican Party.
In more compliant states, such as Idaho, service workers may gain approximately $1,325 extra each year if they earn around $25,000 from tips.
Taxes on Social Security Benefits
Trump’s legislation also extends tax relief aimed at older Americans, providing a one-time $6,000 credit for those aged 65 and older through the tax year 2028. Yet, not all states have implemented similar measures.
Eight states, including Colorado, Connecticut, Minnesota, New Mexico, and others, still tax Social Security benefits entirely.
A spokesperson from the Alliance on Seniors emphasized the financial strain on seniors living on fixed incomes, as many face rising costs for essentials. If states don’t apply the same federal tax breaks, retirees could bear heavier tax burdens based on their residency.
In Vermont, tax exemptions for Social Security income only apply to individuals earning under $55,000 or married couples under $70,000, compared to federal guidelines that start phasing out benefits at $75,000.
Tax on Overtime Pay
The legislation also eliminated federal income taxes on eligible overtime pay, yet 30 states and D.C. still tax it at the state level.
Under this law, individuals can remove up to $12,500 of qualifying overtime pay from their federal taxes. In states like Michigan, similar deductions apply for state taxes until 2028.
Labor groups argue that federal credits should recognize the Fair Labor Standards Act regarding overtime for certain transport workers, who may often need to work more than 55 hours per week to qualify for extra pay.
Greg Regan, president of a major transportation union, pointed out that many workers in specific industries lose part of their overtime pay to state and federal taxes—something he believes is fundamentally unfair.
“For a number of hourly workers, this tax reduction could mean thousands more in take-home pay,” he stated.
Education Freedom Tax Credit
The Big and Beautiful Bill introduced a federal tax credit aimed at promoting school choice through scholarships, though participation is voluntary for each state. So far, 29 states have opted in.
This initiative allows taxpayers to donate up to $1,700 to approved scholarship organizations and receive a full refund. Donors in states that choose out can still contribute, but those funds will support students in other states.
“It’s unfortunate to think about the missed opportunities for students in states that don’t participate. Donations that could aid local children in accessing different schools are lost,” remarked Matt Frendewey, vice president of an education advocacy group.
Tommy Schultz, CEO of a school choice advocacy organization, echoed the sentiment, describing the program as essential. He urged any governor who’s hesitant to reconsider based on the needs of their constituents.
