Hochul Announces Proposal to Eliminate State Income Tax on Tips
New York Gov. Kathy Hochul announced she will include a proposal in her fiscal year 2027 budget to eliminate state income tax on up to $25,000 of tipped income for tax year 2026. The move aligns New York with the recent federal “no tax on tips” approach included in the One Big Beautiful Bill Act and is presented as part of a broader affordability agenda the governor says has returned billions to households across the state.
What the Proposal Would Do
Under the plan Hochul will propose, eligible tipped income would be exempt from New York state income tax up to a $25,000 annual limit. That mirrors the federal provision that allows certain workers to exclude qualified tips up to $25,000 from taxable income between 2025 and 2028. The exemption is aimed at workers in restaurants, bars, personal care, hospitality and other service industries who receive a substantial portion of compensation in tips.
Who Stands to Benefit
- Servers, bartenders and other front-of-house restaurant staff
- Hairdressers, barbers and salon workers
- Housekeepers, hotel staff and other hospitality workers
- Any worker whose major portion of earnings comes from tips
Why the Change Now
Hochul framed the proposal as part of an affordability push that includes middle-class tax cuts, expanded child tax credits, and minimum wage increases. The announcement followed pressure from Republicans and service-industry advocates who argued that states should conform quickly to federal tax changes so working-class residents see the benefits without delay.
“I’m kicking the new year off with a proposal of no state income tax on tips, continuing my efforts to make New York more affordable for hard working New Yorkers,” Hochul said in her office release.
Reactions from Workers and Employers
Service workers and business owners have welcomed the proposed tax relief as a practical boost. For many tipped workers, even modest increases in take-home pay can affect day-to-day expenses, savings and the need to pick up extra shifts.
“If we weren’t taxed on our tips, we’d be able to save more, we’d enjoy life a little more, maybe we wouldn’t have to pick up that extra shift,” said a bartender who spoke to local media.
Restaurant owners say the exemption could help with hiring and retention as the industry continues recovering from COVID-era disruptions.
Political Context and Criticism
The announcement also comes amid partisan debate. Critics, particularly conservative commentators and some Republican officials, have argued Democratic governors were slow to adopt state-level versions of the federal tip exemption. The Treasury secretary publicly chided some Democratic governors for the delay, and Hochul responded by dismissing the criticism in a tongue-in-cheek exchange on social media.
“Grinch fanfic,” Hochul quipped in response to a post calling out governors for not conforming immediately to federal changes.
Opponents question why it took federal action and public pressure for state leaders to act and say adoption timelines should have been faster. Supporters counter that aligning state policy with federal law avoids administrative complexity and ensures workers receive clear, immediate benefits.
Budget Process and Next Steps
The tip-tax exemption is slated to be introduced as part of Hochul’s fiscal year 2027 budget package. That means the proposal will go through the standard budget negotiation process in Albany, where lawmakers can amend, approve, or reject elements of the plan. Key considerations during negotiations will include the exemption’s fiscal impact on state revenues and technical rules defining which payments qualify as “tipped income.”
Potential Fiscal and Administrative Considerations
- Revenue impact: A state-level exemption would reduce personal income tax receipts tied to tipped workers; budget analysts will quantify that effect.
- Eligibility rules: Lawmakers must define which occupations and types of tips qualify to prevent loopholes and ensure compliance.
- Administration: Tax forms and employer reporting guidance will need updates to reflect the exemption and match federal timing.
Bottom Line
Gov. Hochul’s proposal to exempt up to $25,000 of tipped income from New York state taxes would extend federal-style tax relief to many service workers. If approved, it could meaningfully increase take-home pay for tipped employees, aid hiring in labor-strapped industries, and become a political talking point ahead of elections. The measure now heads into Albany’s budget process, where its path will depend on lawmakers’ priorities, fiscal trade-offs and technical drafting decisions.
