(The Center Square) – With President Donald Trump promising an end to federal income taxes on tips and overtime pay, a group of North Carolina legislators is offering a similar exemption for state income taxes.
State Reps. Harry Warren, John Bell, Erin Paré and Allen Chesser on Wednesday introduce House Bill 11, which abolished state income taxes on tips and overtime. It also provides a tax deduction of up to $2,500 on employee bonus pay.
Under the legislation, there would be no state taxes on any amount of tips or overtime pay.
“This is a common-sense way to reward hardworking hourly employees who go above and beyond to support their families,” Warren said in a statement. “It also incentivizes workers to take on extra shifts and helps employers fill vacant positions.”
The legislation will increase take-home pay and fuel job growth,” said Bell, chosen this sesson as the chairman of the Rules Committee. “The legislation would be effective in the tax year beginning Jan. 1 of this year.”
The National Restaurant Association has praised the elimination of taxes on tips.
“Eliminating taxes on tips would put cash back in the pocket of a significant number of workers in the restaurant and foodservice industry and could help restaurant operators recruit industry workforce,” association spokesman Sean Kennedy said in a statement. “The No Tax on Tips Act of 2025 is sensible legislation that includes refinements and protections to make it fiscally responsible while still supporting our employees.”
But Alex Muresianu, a senior policy analyst at the nonprofit Tax Foundation, has criticized the no-tax-on-tips proposal, which was also endorsed by then-Vice President Kamala Harris, the Democratic nominee in the 2024 presidential election.
Only 2.5% of American workers receive tips, Muresianu wrote. Many of the them don’t make enough to pay federal income tax, he added.
“By making one type of income (tips) exempt from income tax, while other types of income (most importantly, wages) remain taxable, the proposal would make more employees and businesses interested in moving from full wages to a tip-based payment approach,” he wrote.
More employers switching to a tip-based income model could be expensive for the government Muresianu said.
“No tax on tips might be a catchy idea on the campaign trail,” he wrote. “But it could create plenty of headaches, from figuring out tips on previously untipped services to an unexpectedly large loss of federal revenue.”
