President Donald Trump’s legislative effort to eliminate federal taxes on tips, overtime pay, and other incomes took effect on July 4, 2025, promising increased take-home pay for many Americans. However, the implementation of these tax cuts at the state level has varied significantly, creating a complex and uneven landscape for workers across the country.
Several states, particularly those with Democratic leadership, have elected not to conform to the federal tax changes, resulting in continued state-level taxes on income sources that are now exempt federally. This divergence has disproportionately affected service industry workers such as waitstaff and bartenders, as well as retirees and hourly employees.
According to a recent analysis of state tax policies, Connecticut, Minnesota, New Mexico, Rhode Island, and Vermont stand out for taxing all major income categories covered by the federal law. These states maintain some of the highest state tax burdens on income types that Congress intended to exempt, including tips and overtime pay. In addition to this, these states have declined to participate in the Education Freedom Tax Credit program, an initiative included in the legislation to provide tax benefits related to schooling.
Other states have taken a more mixed approach. In New York, for example, residents still pay state taxes on tips and overtime wages. However, Governor Kathy Hochul has proposed legislation aimed at exempting tips from state income tax. New York has also chosen to exempt Social Security benefits from state taxation and plans to adopt the school education tax credit program starting in 2027.
California continues to tax tips and overtime pay, and students there will not benefit from the school education tax credits at this time. That said, California does exempt Social Security benefits from state income tax.
As of July 2026, 31 states plus Washington, D.C., still levy taxes on tips, with tax rates in some states reaching nearly 10%. For instance, in Minnesota, tax rates range from 5.35% to 9.85%. A hypothetical server earning $70,000 annually—$25,000 of which comes from tips—would face a 6.8% state income tax rate in Minnesota, effectively reducing their tips by about $1,700 due to state taxation. New Mexico has also faced criticism from its restaurant association for taxing tips despite the state's robust revenue from the oil and gas sector.
In contrast, states that have conformed to the federal tax changes, such as Idaho, have enabled service industry workers to retain a greater portion of their earnings. In Idaho, workers who earn an average of $25,000 in tips annually may see an increase in disposable income of approximately $1,325.
The legislation also included expanded tax relief for older Americans by providing a temporary $6,000 deduction for individuals aged 65 and older, valid through the 2028 tax year. However, this provision has not been universally adopted at the state level. Eight states—Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont—continue to fully tax Social Security benefits, limiting the intended financial relief for seniors residing in those areas.
The variation in state responses underscores the continuing complexity of tax policy in the United States and highlights how state-level decisions can significantly influence the impact of federal tax reforms on individuals’ finances.