22, 2026 6:30 am EST
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The ‘No Tax on Tips’ rule from the One Big Beautiful Bill Act (OBBBA) signed in 2025 could save service workers a decent amount on their taxes each year. But it might not be that simple – some states and cities have found ways to keep taxing tips despite the federal law. It’s a bit of a mixed bag, with some places embracing the change and others pushing back.
Congress has tried to block places like Washington, D.C. from getting around the federal law, and New York is even working on its own state-level ‘No Tax on Tips’ rule. But for now, Maine and Illinois are sticking to their guns and continuing to tax tips, which has a lot of people feeling confused. Plus, there are concerns that all these tax cuts could really impact government budgets in the long run.
Why state and local officials want to continue taxing tips
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While the ‘No Tax on Tips’ law could help a lot of working folks, it might not be all sunshine and rainbows. The Congressional Budget Office estimates it could add over $50 billion to the national deficit by 2034, and reduce federal revenues by over $31 billion. With the national debt already sky-high, it’s no wonder some officials want to keep collecting those tip taxes.
Maine’s governor, for instance, thinks the OBBBA’s tax cuts could cost her state’s budget around $400 million. And Maine isn’t even considered a low-tax state – imagine how much harder it could hit places with tighter budgets. So a lot of state and local leaders are feeling hesitant to give up that sweet, sweet tip tax revenue.
Ambiguities in tax law might confuse taxpayers
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The federal ‘No Tax on Tips’ rule has some tricky details that could really trip up service workers. For one, the tips have to be voluntarily given by customers to qualify – any automatic gratuities or service charges could still be taxable. So even in states that stopped taxing tips, workers might need to keep track of how each tip was earned.
Plus, folks in states that kept the tip tax will have to figure out what they can deduct federally versus what they have to report locally. And since Illinois and Maine are bucking the trend, other states could follow suit – so service workers everywhere may want to stay on top of their state’s tax laws.
