Here’s how much ending taxes on tips would save—and how much it would cost

Arizona Republicans are trying to make tips exempt from state income tax to fall in line with one of President Trump’s campaign promises, but opponents say it’s a political ploy to appear pro-worker only on the surface level.

House Bill 2081, proposed by Rep. Gail Griffin, R—Hereford, would let tipped workers deduct income they receive directly from customers, or what Griffin calls a “gift,” from their taxable income. 

In Arizona, where tipped employees make an average of $10,000 per year on tips, that would amount to an annual tax savings of $250. While the individual benefit would be small, the collective hit would be massive: if signed into law by Democratic Gov. Katie Hobbs, Griffin’s tax exemption bill would result in a projected $31 million loss in tax revenue for the state.

“My children [work as] servers…I am 100% for it,” said Rep. Mariana Sandoval, D—Goodyear, during a committee hearing on the bill. “I have the same concerns that my colleagues have about the $31 million hit that this will take on the budget.”

Labor advocates like Brendan Walsh, executive director of Worker Power, are critical of such tax exemptions, as they don’t raise wages for tipped workers or increase their longterm financial stability.

“I think that anything we can do to lower taxes on working people is great,” Walsh said, and that the lost state revenue from a lower tax rate on working people should be offset by raising taxes on corporations and the wealthy. “We shouldn’t be using them to starve public schools and such.”

Arizona voters have historically been proactive in passing and protecting living wage laws. In last year’s session, the Republican majority voted to refer a measure to the 2024 ballot that would have reduced the tipped minimum wage for Arizonans, but it was overwhelmingly rejected by voters as the second most unpopular item on the ballot.

Arizona Republicans have consistently attempted to chip away at the state’s worker-friendly wage laws. While Arizona has one of the highest minimum wages in the country, it’s not to the credit of the legislative majority—but a 2016 citizen’s initiative put on the ballot by progressive groups, which voters approved.

In the bill’s committee hearing, Rep. Quantá Crews, D—Phoenix, said a better alternative would be to raise the wages of restaurant workers, which would have a more direct effect without negative effects on the state’s tax revenue base.

A hit to Arizona’s tax revenue base

Jeremy Garrett, a lobbyist for Our Voice Our Vote Arizona, spoke in support of the bill, and said the state should not be relying on income taxes from those who already are struggling to afford basic necessities.

“We should focus on creating a fair tax system that does not disproportionately impact those in the service industry,” Garrett said.

But Walsh said tax exemptions like these give businesses a pass: raising the tipped minimum wage would force companies to pay their fair share. Instead, this bill lets employers off the hook from paying workers what they should make, Walsh said.

The legislature’s overall approach benefits corporations much more than it benefits the workers, he said.

Already, state law requires employers to pay workers the minimum wage of at least $14.70 an hour — and allows restaurants to pay their workers less, if tips get them to the minimum wage.

Joseph Palomino, director of the Arizona Center for Economic Progress, said the bill would give preferential tax treatment to a small subset of workers—tipped workers in the restaurant industry—while there are many other hard workers in other industries like childcare and elder care who would not benefit.

Many workers wouldn’t be able to benefit from the tax relief due to a lack of access to accountants to help them through the process, Palomino said.

Playing political games

President Donald Trump made eliminating taxes on tipped wages a major campaign theme in a political ploy to appeal to working class voters—while also promising to cut taxes for the wealthiest people in America—and Arizona Republicans in the state legislature seem to be following in his footsteps.

“I believe it is the goal of both parties to help families that are struggling,” said Rep. Seth Blattman, D—Mesa. But, he said he believes the best way to help them is with state-funded programs like food assistance and social services, rather than starving the state of tax revenue.

Tax exemption on tips would do the opposite: in addition to slashing tax revenue that pays for social services, a federal exemption would cut into tipped worker’s public retirement benefits. While it would save them less than $1,000 per year in the short term, it would cost them nearly $9,000 in annual Social Security benefits when they leave the workforce.

“I think the main concern is political in terms of scoring political wins and reducing taxes and starving public schools and other necessary services for the government,” Walsh said. “I do not think it represents real caring for working class people on the part of the Republicans in our legislature.”

Blattman introduced an amendment to the bill, which was rejected by the Republican majority, to place a cap on how high a worker’s wage could be to receive the tax benefit, intending to prevent high-earning, white-collar workers from reporting additional income as tips to avoid taxation.

Under the amendment, a tipped worker making more than 80% of the area median income would not be able to benefit from no taxes on their reported tipped wages.

“​​Helping working families during a time of rising prices is something we all want to do,” Blattman said. “We are trying to…curb waste, fraud and abuse…The possibility of a person that makes a million dollars a year reclassifying their compensation as tips could result in an unintended consequence.”