States Should Bring the Working Families Tax Cut Back Home

Overview  

Income taxes discourage work, and families deserve to keep more of what they earn. The transformative tax cuts from the One, Big, Beautiful Bill build on the Trump administration’s existing tax reform legacy. With the passage of this bill, also referred to as the Working Families Tax Cut, American taxpayers avoided a $4 trillion tax hike.¹ The new law also provides additional tax relief to working families through a temporary provision to not tax tipped income.²

This special tax deduction brings financial relief and stability to workers, but only on their federal tax bill. States should mirror the federal income tax deduction for tipped income to bring relief to state taxpayers.

The One, Big, Beautiful Bill averted the largest tax increase in recent history

In July 2025, congressional Republicans passed, and President Trump signed into law, the One, Big, Beautiful Bill—the Working Families Tax Cut—averting a $4 trillion tax hike.^3-4 The law extends the tax cuts from President Trump’s Tax Cuts and Jobs Act of 2017 (TCJA), which brought tax relief for working families, simplification for taxpayers, and many pro-growth business tax cuts.⁵ In the first few years following the passage of TCJA, real household income for the median family rose by more than $6,000, including the largest one-year median income increase on record, and wage growth accelerated, especially among lower-income families.⁶ This tax relief was scheduled to sunset at the end of the 2025 calendar year.⁷ Inaction would have resulted in a $4 trillion tax hike.⁸

Without the Working Families Tax Cut, American taxpayers would have seen a smaller standard deduction, higher rates, and narrower tax brackets in 2026.⁹ Fortunately, the tax hike was avoided, and the TCJA reforms were strengthened. The Working Families Tax Cut made this landmark tax relief permanent.¹⁰

Personal income tax rates and brackets were made permanent, fixed at the lower, TCJA levels.¹¹  The new law set the standard deduction, claimed by the majority of tax filers, to TCJA levels and provided a temporary boost for the upcoming tax years.¹² The law also extended the expiring business provisions, including the lower rates and pass-through provisions.¹³

The Working Families Tax Cut is expected to bring higher wages and take-home pay, higher real investment, and an increase in jobs.¹⁴ Surging investment, lower debt as a share of gross domestic product, and a blue-collar boom are among the key objectives.¹⁵ The law also included novel tax provisions directed to working families: no tax on tips, overtime, and retirement.¹⁶ These tax deductions fulfill President Trump’s campaign promises to the working-class families who struggled through historic inflation under the Biden administration.¹⁷ Hardworking American families should keep more of what they earn.

The new law allows working families to deduct tips from their federal tax bill

Iterations of a federal tax deduction for tips have been pitched in the past.^18-20 But with the Working Families Tax Cut, no tax on tips is now a reality.

Tips are considered taxable income.²¹ They are discretionary payments that employees receive from customers. Cash tips, credit card tips or other electronic settlements, and pooled tips received by an employee are deemed to be tipped income.²² The overall trend toward cashless payment systems can increase the burden on tip earners.^23-24 Moreover, tipped income earners are often low- and middle-income taxpayers.²⁵ The new law will help to increase their take-home pay.

There are roughly six million Americans who report tipped wages.²⁶ A variety of industries and occupations rely on tips: restaurant servers, bartenders, bellhops, and housekeepers, in addition to personal care aides, wedding planners, golf caddies, and charter boat deckhands.²⁷ No tax on tips is estimated to increase the average take-home pay for tipped workers by $1,675 per year.²⁸

In practice, no tax on tips provides workers with a $25,000-per-year federal tax deduction on their tipped income.²⁹ No tax on tips is retroactive, meaning workers will keep more of their tipped income earned in 2025.³⁰ The federal deduction is set to expire after 2028.³¹ It phases down for high-income earners, decreasing by $100 for each $1,000 earned above $150,000 for single filers.³² 

States can mirror the federal tax deduction for tipped income

The new law is already a win for working-class families, and states can share the win by bringing no tax on tips to their residents. Tipped income workers will see relief on their federal tax bill. Why should they get hit with a bill from their state?

States that do not tax personal income are ahead of the game. Moreover, a handful of states use federal taxable income rather than adjusted gross income when calculating taxable income.³³ These seven states—Colorado, Idaho, Iowa, Montana, North Dakota, Oregon, and South Carolina—will automatically conform to no tax on tips.³⁴ Though savings to taxpayers will vary among states, working families in each state could benefit.

The Bottom Line: States should mirror the federal income tax deduction for tipped income to bring relief to state taxpayers.

The Working Families Tax Cut averted major tax increases. High taxes reduce incentives to work, and the new law ensures hardworking Americans do not see their taxes return to high levels. Provisions like no tax on tips ensure that working families keep more of their take-home pay.

States are already starting to take action to bring this provision home to their state.³⁵ Other states are considering no tax on tips at the state level.^36-37 Notably, the federal provisions for working families are scheduled to sunset at the end of 2028. States could deliver more tax relief, codifying no tax on tips so that working families keep more of their earnings indefinitely. This popular provision is already law for working families’ federal tax bills. States can act to bring this tax relief back home.

DOWNLOAD PAPER [PDF]