Several U.S. states have announced they will not adopt a new federal proposal that would eliminate taxes on tips for service workers. The measure is part of a broader federal bill scheduled to take effect on January 1 and is intended to provide tax relief for employees who rely heavily on gratuities.

Under current law, states handle tipped income differently. Some allow employers to pay a lower base wage if tips make up the difference, while others require higher hourly pay but include mandatory tip-sharing arrangements. Because of these differences, states must decide individually whether to align with the federal change.

New York officials have confirmed the state will continue taxing tips, citing concerns over losing more than $1 billion in annual revenue. While the policy remains under review, no immediate changes are planned.

California has also stated it will not conform to the proposal, estimating a potential loss of $3.2 billion that supports public services. Adopting the federal rule would require new state legislation.

Illinois plans to maintain its current system as well, requiring taxpayers to include tips and overtime pay when calculating state taxable income.

In contrast, states such as South Carolina, Iowa, North Dakota, Idaho, Montana, and Oregon automatically follow federal tax code changes, meaning the policy would apply there without additional legislation.

As the broader bill moves forward, the debate highlights how differently states balance tax relief, worker support, and revenue needs.

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