JEFFERSON CITY, Mo. — With legislative sessions commencing across the U.S. in January, lawmakers in various states are faced with a pivotal decision: should they adopt new tax breaks for tips and overtime wages championed by President Trump’s administration?
These proposed federal tax breaks, which also include deductions for automobile loans and business equipment, have sparked debate, particularly since the implications for state revenues could be significant. In states that choose to conform to the federal tax rules, residents and businesses could see substantial annual savings, possibly amounting to hundreds of millions of dollars.
However, the financial burden on states is a considerable concern. Many states are already grappling with increased costs from new federal requirements on healthcare and food assistance programs, raising questions about the sustainability of adopting further tax breaks.
As tax laws vary across the country, the effects of these decisions could play out differently. States like Michigan have opted to implement changes that exempt tips and overtime from state taxes, while others remain unconvinced. Carl Davis, research director at the Institute on Taxation and Economic Policy, notes a general skepticism among state lawmakers toward adopting these new tax breaks.
Over the next few weeks, states will need to act swiftly if they intend to make these changes retroactively, positioning themselves in a complex legislative landscape as they consider the timing and impact of these significant fiscal changes.
