This story originally appeared in New York Focus, a nonprofit news publication investigating power in New York. Sign up for their newsletter here.
Mayor Zohran Mamdani is haggling with Albany over every cent he can get for New York City in the state budget. But he is raising no objections as the state embraces a tax policy, widely criticized by economists, that will cost the city hundreds of millions of dollars.
Governor Kathy Hochul is proposing to eliminate state income taxes for tipped wages up to $25,000. The move followed pressure from her Republican challenger in this year’s election and would align New York with an identical change to the federal tax code enacted by President Donald Trump last year. The state Senate and Assembly are backing Hochul’s proposal, meaning it will likely be approved in the final state budget.
With its populist appeal, “no tax on tips” has enjoyed bipartisan support since Trump first proposed it during his 2024 presidential campaign; Democrat Kamala Harris quickly followed suit. But tax policy experts across the ideological spectrum are deeply skeptical, calling the policy unfair and potentially harmful to the workers who need the most help.
It also comes at a cost. The state expects to lose $200 million in tax revenue over the next four years as a result of the policy. New York City’s income tax is modeled on the state’s and could take an even bigger hit: The city projects the policy will cost $239 million in lost city revenue over four years, canceling out some of the increased aid that Mamdani is hoping to win from Albany.
But Mamdani says he supports ending taxes on tips.
“I think it’s the right position to take, to make it easier for working-class New Yorkers to be able to afford to live in our city,” the mayor said Wednesday in response to a question by New York Focus.
Workers’ groups have said little about the proposal, while fiscal experts call it irresponsible.
“We think it should be rejected,” said Andrew Perry, director of fiscal research at the left-leaning Fiscal Policy Institute. “Both houses of the legislature have put forward plans to shore up the city, so it is very counterproductive to put things that erode the city’s tax base on the table.”
Perry and other economists also say the measure is just bad policy. Exempting taxes on tips is unfair, experts have argued, since it would benefit certain workers in the service industry but do nothing for other low- to middle-wage workers like teachers and cashiers who don’t receive tips.
“The state and city should not be giving preferential tax treatment to one type of income over another, which is what a deduction for tipped income does,” said Ana Champeny, vice president for research at the fiscally conservative Citizens Budget Commission. “This is not smart tax policy.”
Critics also fear that the policy will incentivize employers to shift their waged workers to tipped, subminimum wage work; undermine efforts to raise the minimum wage; and, over time, encourage more compensation to come from customers’ tips and less from employers. (New York City and State both have lower minimum wages for tipped workers than wage–based workers.)
Predictably, perhaps, major business groups have vocally supported the policy. The National Restaurant Association, which has opposed proposals to raise the minimum wage, is the leading national backer of “no tax on tips.”
The same dynamic holds true in New York. The New York City Hospitality Alliance, which represents restaurant owners, supports the governor’s proposal, according to Andrew Rigie, the group’s executive director. (The Hospitality Alliance opposes a City Council bill to raise the minimum wage to $30 — one of Mamdani’s campaign promises.)
Meanwhile, New York’s unions haven’t said much about the proposal. The Hotel and Gaming Trades Council, which represents thousands of tipped hospitality workers, is supportive, an official told New York Focus. Unite Here Local 100, which represents food-service workers, did not respond to requests for comment.
Elsewhere, unions and other workers’ groups have given the policy mixed reviews. About two-thirds of New York’s roughly 320,000 tipped employees would see some tax savings from the policy, according to the nonprofit One Fair Wage. But the group has argued for putting more attention on ending subminimum wages.
Ending taxes on tips “affects a small slice of the workforce,” said Angelo Greco, a One Fair Wage spokesperson. “We have to get to the root issue, which is raising wages.”
Even some supporters point out that “no tax on tips” gives the biggest benefits to middle- and higher-income earners, since the federal law applies to anyone earning up to $150,000 and the lowest-income workers pay relatively little taxes.
Some lawmakers have similar concerns. Although the state Senate officially supports Hochul’s plan, Liz Krueger, the Senate’s finance committee chair, said in a text message that “the concern [about] the governor‘s proposal is that it is not targeted specifically to lowest wage workers.”
Not taxing tips “could result in people who are already making a good living shifting their model of earnings to avoid paying taxes on a decent percentage of their income,” Krueger said. “This is not the intention of expanding tax-free earned income and could translate into significant amounts of wages suddenly being tax-free for no justifiable reason.”
The mayor’s office did not respond to questions about the policy’s fiscal impact. The governor’s office noted that Hochul supported raising the state’s minimum wage, which is currently $16 per hour and will rise along with inflation starting next year.
“The governor’s ‘no tax on tips’ proposal allows New Yorkers to keep more of their hard-earned money, delivering real relief to working people across the state,” Hochul spokesperson Kassandra White said. “This proposal grows on the governor’s efforts to put more money back in New Yorkers’ pockets including increasing the minimum wage, delivering inflation refund checks, and cutting middle-class taxes –– making New York more affordable and livable.”
Hochul’s January 1 announcement that she would propose the policy came six days after the New York Post published a front-page story criticizing her as a “Scrooge” for failing to do so. The article quoted Bruce Blakeman, her Republican opponent for re-election, who said Hochul was “sticking it to the service industry by blocking real tax relief on tips and overtime.”
She has said little about the policy since then, giving it no mention in her State of the State speech a few days later.
Hochul’s office projects a smaller impact on New York City’s budget from “no tax on tips”: just $38 million over the next two years. Neither the city nor the state has explained the discrepancy.
The federal exemption is scheduled to expire after 2028, meaning the city and state’s policies would also end that year unless the policy is extended at the local or national level.
New York did not need to follow Trump’s lead. Illinois, Maine and Washington D.C. all opted out of “no tax on tips,” in part because they stood to lose significant revenue, according to the Institute on Taxation and Economic Policy, a nonpartisan think tank. But New York will join states like Arizona and Colorado that are choosing to conform with the federal law.
New York City may be the only locality in the state significantly affected by ending taxes on tips. The city had about half of the state’s tipped workers as of 2014, according to a Community Service Society report. And New York is one of just two cities in the state with its own income tax modeled after the state’s. (The other, Yonkers, has not yet calculated the impact of “no tax on tips” on its budget, a city spokesperson said.)
The city projects it will lose $56 million in the next fiscal year as a result of the policy. That’s a small fraction of the $127 billion city budget — but it’s larger than several of the state funding cuts that Mamdani is pushing to reverse, and also bigger than nearly all of the city agency savings that Mamdani announced last week as part of a cost-cutting effort to help bridge a multi-billion dollar budget gap.