By Brayden Ruvo.
House Bill 2081 (“HB 2081”), commonly known as the “No Tax on Tips Bill,” is a proposed piece of legislation aimed at exempting tipped wages from taxable income in Arizona. On February 10th, 2025, the bill passed the House Committee on Ways and Means and is now awaiting review by the Senate.
Current Tax Treatment of Tips in Arizona
Currently, Arizona follows federal guidelines when it comes to taxing tips, meaning tips are subject to state income tax. Arizona residents must report any tips they receive on their state income tax return, and those tips are taxed at the same rate as their regular wages. Tipped employees are required to report their tips on both their federal Form 1040 and state income tax returns.
The Push for No Tax on Tips: The Federal and Arizona Context
The idea of eliminating taxes on tips gained significant attention during the 2024 presidential election, with support from both sides of the political aisle. Notable figures, including former Vice President Kamala Harris, President Trump, and Senators Ted Cruz (R-TX) and Jacky Rosen (D-NV), expressed support for the proposal. The federal bill introduced in response would allow tipped workers to fully deduct their tipped wages when filing taxes. Supporters argue that it would help boost the financial stability of working-class Americans by putting more money in their pockets.
While awaiting federal action, Arizona lawmakers have taken matters into their own hands. HB 2081, proposed by Representative Gail Griffin (R-Hereford), aims to allow Arizona’s tipped workers to exclude their tips from taxable income directly, without waiting for a federal change.
The bill’s proposed amendment to Arizona law (A.R.S. § 43-1022) adds that the following will be subtracted from gross income:
For taxable years beginning from and after December 31, 2024, to the extent not already excluded from Arizona gross income under the internal revenue code, compensation received as cash tips during the taxable year that are reported to the employer pursuant to 26 United States Code Section 6053(a).
As it stands, however, many Democratic lawmakers oppose the bill. While the potential economic benefits are clear, there are concerns over the consequences of such a measure if it is not carefully implemented.
Implications of Exempting Tips from Taxes
While the broader federal implications of tax-exempt tips, such as their impact on tax credits, are important, the immediate focus here is the effect on Arizona workers and the state’s budget.
First, exempting tips from taxation could potentially benefit employers at the expense of workers. If tips are no longer taxed, employers might feel less pressure to raise base wages, using the tax advantage of tipped income to justify not increasing pay. This could impose a financial burden onto workers, leaving them with fewer resources even though the bill is intended to help them.
Second, while the bill aims to help Arizona’s working-class citizens, it could also inadvertently benefit higher earners. Those who can afford accountants and tax attorneys might use the exemption to avoid paying taxes on larger sums of income from tips, particularly in high-ticket service industries like law or healthcare. To address this, some have suggested limiting the exemption to certain professions or setting a cap on the amount of income from tips that can be claimed. Regardless, fairness is a key consideration when implementing new tax law, and this is no exception.
Finally, there are concerns about the loss of state revenue. If passed, HB 2081 could reduce Arizona’s tax revenue by an estimated $31 million annually, beginning in 2026. Opponents of the bill argue that the lost revenue could be better spent on programs like food assistance and social services, which help struggling families. Furthermore, if high earners exploit the loopholes mentioned above, this revenue loss could be even greater, further stressing Arizona’s budget. A reduction in state funding could impact essential services, including public education, infrastructure, and anti-poverty programs.
Is HB 2081 Good for Arizona?
The answer isn’t clear-cut. While the bill could provide much-needed relief to Arizonans who rely on tips for their livelihood, it could also lead to unintended consequences. Without safeguards, such as a cap on the dollar amount of untaxed tips that can be earned or measures to protect low-income workers, HB 2081 may not fully achieve its goal of supporting Arizona’s workforce.
Arizona’s legislature has shown initiative by addressing this issue proactively, but as with any proposed tax policy, HB 2081 needs further revisions to limit future reactive amendments and ensure the measure benefits all Arizonans equitably.
Brayden Ruvo is a second-year law student interested in tax and white-collar prosecution. Prior to law school, he studied Accounting at Central Washington University and held various Finance roles in the hospitality industry. Brayden has externed with the Fraud & Special Prosecutions section of the Arizona Attorney General’s Office, as well as with the Arizona Supreme Court Staff Attorney’s Office.