Illinois tipped workers hoping for relief under the new federal “no tax on tips” rule are in for a rude awakening—Illinois won’t be adopting the exemption.
Despite the IRS giving tipped workers a break at the federal level, Illinois will still require them to pay state income taxes on their tips. That’s because the state’s tax code doesn’t automatically conform to federal changes, according to Manish Bhatt, senior policy analyst at the Tax Foundation.
“Only those states that begin state-level income tax calculations using the federal definition of taxable income have it automatically incorporated into the tax code,” Bhatt told The Center Square. “I don’t believe Illinois does that.”
Even for states that do follow federal tax changes, Bhatt said decoupling from this specific exemption could be the more responsible fiscal path.
“It’s much more sound tax policy to not create carve-outs for certain taxpayers at the expense of others,” he explained. “General reform needs to happen to bring the tax burden down for everybody.”
Bhatt warned that the split between state and federal tax treatment could confuse many Illinois taxpayers. “It’s not that those individuals are trying to avoid taxation. They just don’t know to add that back into their state income tax,” he said.
This confusion could lead to tax filing errors or force workers to pay for professional help they otherwise wouldn’t need.
“There’s a number of inefficiencies… that lawmakers need to be aware of,” Bhatt said.
Illinois is already among the nation’s highest-taxed states, particularly on property. Bhatt acknowledged the political difficulty of denying tipped workers a tax break.
“This is an example where good politics doesn’t always make good policy,” he said. “When you create a carve-out for a certain industry or company, you’re shifting the burden onto somebody else.”
Bhatt argued that Illinois lawmakers should instead focus on broad-based tax reform that benefits all workers. “Lawmakers should prioritize sound and broad tax reform in the state so that everybody benefits,” he said.
He also cautioned against the distortions selective tax exemptions could create in the job market.
“You could have two workers earning the same salary but facing different tax burdens simply because of the nature of their jobs and how they’re paid,” he explained. For example, a bank teller and a waiter both earning $30,000 could face very different tax bills under such a system.
Bhatt said this could even lead businesses to shift how workers are compensated. “There will be the incentive for employers to shift the way that their workers earn their money,” potentially pushing more people into tip-eligible roles just to lower tax burdens.
