What's happened
New York Governor Hochul proposes eliminating state income taxes on up to $25,000 in tips, aligning with federal policy. Meanwhile, many states are not adopting recent federal tax provisions, affecting workers and budgets. The IRS predicts larger refunds due to unadjusted withholding from 2025 law.
What's behind the headline?
The divergence between federal and state tax policies highlights political and fiscal tensions. While the federal law aims to provide immediate relief and boost consumer spending, states like New York are hesitant to conform due to projected revenue losses, estimated up to $1.7 billion for New York. Service workers, dependent on tips, are particularly affected, with many feeling left behind as their income is taxed more heavily at the state level. The IRS's prediction of larger refunds stems from the fact that withholding adjustments were not made when the law took effect, leading to a significant one-time benefit in 2026. This creates a paradox where taxpayers receive a windfall, but the long-term fiscal sustainability of state budgets remains uncertain. The broader political debate centers on balancing fiscal responsibility with economic relief, especially for low-income workers. The upcoming state budget will reveal whether New York and others will choose to conform to federal provisions, impacting millions of workers and the state's fiscal health.
What the papers say
The New York Post reports that New York has yet to extend the federal 'no tax on tips' policy, causing discontent among service workers who see their income taxed at the state level. Meanwhile, the Post also highlights that the IRS predicts large refunds due to unadjusted withholding, with estimates of $1,000 to $2,000 refunds for many Americans. Contrasting opinions come from tax experts cited by the Post, who note that several states, including Colorado, automatically conform to federal law, while others like New York are hesitant due to potential revenue shortfalls. Reuters reports that many blue states are deliberately not adopting these provisions, citing billions in potential budget deficits. Colorado, for example, aligns with federal law but has decoupled from certain provisions, illustrating the complex state-level responses. The libertarian Cato Institute explains that states like Colorado and South Carolina automatically conform, but most others must pass legislation to do so, which many are reluctant to do. The debate underscores the tension between providing immediate tax relief and maintaining fiscal stability, with the political landscape influencing state decisions.
How we got here
President Trump’s 2025 tax law included provisions to reduce taxes on tips, overtime, and Social Security benefits, with some states automatically conforming. However, many blue states like New York, Illinois, and California have not adopted these changes, citing potential budget shortfalls. The law's effects include larger refunds for taxpayers and increased spending power, but state-level adoption varies widely.
Go deeper
Common question
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What Are the New Tax Breaks for Tips in New York?
Recent proposals in New York aim to provide tax relief for workers who earn tips, aligning with federal law. But how exactly do these changes work, and what do they mean for workers and taxpayers? Below, we explore the key questions about these tax policy shifts, how they differ across states, and what impact they might have on your refunds and income. If you're wondering whether your tips will be taxed less or how federal and state policies compare, you're in the right place.
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What Are the Biggest News Stories of Early 2026?
2026 has kicked off with a mix of industry shifts, legal battles, and regional developments. From the latest trends in entertainment and legal disputes in K-pop to infrastructure challenges in Africa, there's a lot happening that could impact your daily life. Curious about what these stories mean for the future? Keep reading to find out the key headlines and what to watch for in the coming weeks.
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