LANSING, Mich. (Michigan News Source) – Service workers across Michigan could soon have something to smile about, as state Rep. Joe Aragona (R-Clinton Twp) is set to introduce House Bill 5941 today, which would amend the Income Tax Act of 1967 and ensure their hard- earned tips are no longer subject to state taxes.

It’s a win for waitstaff, bartenders, and anyone whose income relies on the generosity of others. But let’s give credit where it’s due – this idea isn’t exactly fresh out of Lansing’s think tank. In fact, former Republican President Donald Trump first floated this concept, promising to cut taxes on tips to help workers keep more of what they earn. And soon after that, Democratic Vice President and presidential candidate Kamala Harris took a page out of his economic plan and endorsed the same idea.

Breaking down the bill: who gets what?

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Under Michigan HB 5941, starting after December 31, 2024, tipped employees would be able deduct their reported gratuities from their taxable income. Essentially, if you report your tips as required for Social Security, you won’t have to fork over a slice to the state of Michigan.

The bill defines gratuities as voluntary tips or monetary contributions given by patrons, guests or customers for services rendered to that person and includes an employee working in an occupation where they regularly receive more than $30.00 a month in gratuities.

This move is part of a broader wave of tax reforms aiming to put more cash back into workers’ pockets – and something that others have picked up on, including the State of Nevada and Republican lawmakers at the federal level who currently have at least three bills on the subject in both the House and Senate.

Rep. Aragona explains push behind legislation.

In an interview about the proposed bill, Rep. Aragona shared insights into the bill’s purpose and potential impacts. He explained that the bill, which was inspired by both Donald Trump and Kamala Harris’s support for reducing taxes on tips, aims to reward workers in the service industry who rely on tips as a significant part of their income. Rep. Aragona emphasized, “They have to hustle in order to make more money. And I think that should be rewarded in our society.”

Despite bipartisan support at the federal level, Rep. Aragona expressed frustration that he didn’t have the time to secure Democratic co-sponsors for his bill, attributing it to the limited session days in Lansing. “We haven’t been in Lansing since June,” he noted, indicating the challenge of securing any Democratic co-sponsors on the bill. He remains hopeful, though, saying, “I think there should be some bipartisan effort to push this across the finish line.”

What will the loss of revenue cost the state government?

Missing in most of the discussions at the state and federal levels for this new “no tax on tips” idea is how the government will offset the taxes that it has been collecting from those tips. However, as this bill goes through the House, there will be an analysis done by the House Fiscal Agency which will summarize the bill, report the fiscal impact and the positions taken on the legislation by outside organizations.

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Rep. Aragona highlighted how the rise of digital payments has made it easier to track and tax tips, which he views as unfair. When customers add their tips onto their credit card payments, it makes tracking and reporting tips more formalized, potentially reducing underreporting, which may have previously helped some workers reduce their taxable income.

“Effectively, we’ve actually been imposing this tax slowly over the last few years, and I don’t think that’s fair,” he explained, underscoring the importance of this bill in helping service workers keep more of their hard-earned money. He believes the bill will incentivize more workers to stay in the industry, adding, “If you can work hard and keep more of your hard earned dollars, why wouldn’t you wanna stay in that job?”

What tax experts and some critics of the “no tax on tips” idea say.

On a national level, although exempting tips from taxation could benefit workers who rely heavily on tips, they represent only a small portion of the workforce. According to a Yale Budget Lab analysis, just 2.5% of workers in the U.S. are in tipped occupations, and only 5% of low-income earners fall into this group. Many tipped workers, especially part-timers, already avoid paying personal income tax due to the standard deduction, and others benefit from credits like the Earned Income Tax Credit (EITC) or Child Tax Credit (CTC), eliminating their federal tax liabilities. As a result, critics say this policy would mainly overlook low- and middle-income earners.

The larger issue, according to the Tax Foundation, a leading voice on tax policy, is that exempting tips while keeping wages taxable could incentivize more industries to shift towards a tip-based payment model. This shift could lead to higher costs due to increased tipping in existing fields or the introduction of tipping in new sectors. For example, highly paid professionals like lawyers or accountants could start receiving voluntary tips. While lawmakers could mitigate exploitation by capping exemptions or limiting them to certain professions, enforcing these rules – especially around what qualifies as a true “voluntary” tip – could be difficult for the IRS.

Tipping the scales: Michigan court decision on minimum wage set to reshape service industry.

It should also be noted that the recent Michigan Supreme Court decision regarding tipped workers is set to significantly impact service employees in the state. The ruling, which

changes the minimum wage and tip rules, will take effect in February 2025, gradually phasing out the tip system. In 2025, service workers will see a higher base wage, starting at roughly $6 per hour, making more of their total income subject to taxation.

The elimination of the tip credit, which allows Michigan employers to pay tipped workers less than minimum wage, will fully take effect by 2029, requiring service workers to be paid the full minimum wage. As wages rise, both employees and employers will face new challenges. Restaurant owners, in particular, will need to adjust to the increased labor costs, potentially reevaluating their staffing and compensation structures.

Critics of the new ruling, including Southwest Michigan Regional Chamber President Arthur Havlicek, have expressed concerns that the new change could be devastating to the restaurant industry, forcing businesses to rethink how they manage their workforce and tip- sharing systems.

Rep. Aragona also thinks the new rule is going to be harmfull to the restaurant industry in the state. He told Michigan News Source, “It’s going to unfortunately devastate our restaurant industry. Over 10% of Michigan’s GDP is from tourism and lodging and a lot of that depends on restaurants throughout the area. That is going to really be a detriment to Michigan. So hopefully we can get back to Lansing and we can save the tip credit.”