Congress passes ‘no tax on tips’ as Illinois legislator eyes policy for
state
[July 05, 2025]
By Catrina Barker | The Center Square contributor
(The Center Square) – Congress passed the “one big beautiful bill” and
in it a provision that temporarily exempts certain tipped income from
federal taxes, a major shift from long-standing tax policy treating tips
as taxable income.
Alex Morishaner, an analyst with the Tax Foundation, said their estimate
from last year found that excluding tips from the income tax but not the
payroll tax would impact federal tax funds by $107 billion over 10
years, assuming no behavioral change in tipping.
“We estimate that the Senate version, which caps the deduction for tips
at $25,000 while also restricting the benefits to tips in historically
tipped industries and excluding some higher income taxpayers as well,
would cost $31 billion from 2025 to 2028,” said Morishaner.
Morishaner said the measure could slightly favor tipped workers over
wage earners but expects minimal economic impact due to its limited
scope.
“By restricting the benefits to historically tipped industries, you're
preventing maybe some potentially large behavioral effects where you
wouldn't see, everybody from your lawyer to your, you know, financial
advisor suddenly being compensated by tips,” said Morishaner. “But you
could see smaller versions of those dynamics within currently tipped
occupations depending on how those end up getting defined.”
Morishaner said the IRS has gotten better at collecting taxes on tips
fairly. He also said taxing tips as income, just like any other type of
income, makes sense as a policy.
“It's good that they've been able to improve tracking and collecting
taxes owed on tips and it would be unfortunate to turn back from those
improvements in tax administration,” said Morishaner.
In Illinois, a senator is supporting legislation to extend similar tax
relief at the state level.
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Alan Wooten | The Center Square
State Sen. Chris Balkema, R-Channahon, said Senate Bill 140, which
has not advanced out of committee, would exempt tipped income from
state income tax for workers in eligible industries.
“This is about giving a break to average working people,” Balkema
told The Center Square. “In Illinois, taxes are high across the
board. This bill is an attempt to ease the burden on those working
in restaurants, salons, hotels — people who are often living
paycheck to paycheck.”
Balkema acknowledged concerns that exempting tips could create tax
advantages for certain sectors, but said service workers represent
some of the state’s lowest earners.
“If someone provides excellent service and earns a generous tip,
they shouldn’t be penalized with additional taxes,” he said. “There
are many other areas where we can reduce spending to offset any
potential revenue loss.”
While the federal exemption is now law, its temporary nature — and
its income-based restrictions — mean further debate is likely as it
nears expiration in 2028. At the state level, similar efforts are
just beginning. Balkema said he hopes to reintroduce the measure in
the fall veto session or in the next regular session.
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