Fiscal impact reports (FIRs) are prepared by the Legislative Finance Committee (LFC) for standing finance
committees of the Legislature. LFC does not assume responsibility for the accuracy of these reports if they
are used for other purposes.
F I S C A L I M P A C T R E P O R T
SPONSOR
Duncan/Montoya/Henry/Armstrong/
Hernandez, J.
LAST UPDATED
ORIGINAL DATE 2/25/2025
SHORT TITLE Exempt Tips from Income Tax
BILL
NUMBER House Bill 484
ANALYST Gray
REVENUE*
(dollars in thousands)
Type FY25 FY26 FY27 FY28 FY29
Recurring or
Nonrecurring
Fund
Affected PIT $0 ($21,400.0) ($22,100.0) ($22,600.0) ($23,400.0) Recurring General Fund
Parentheses ( ) indicate revenue decreases.
*Amounts reflect most recent analysis of this legislation.
Duplicates Senate Bill 285
Sources of Information
LFC Files
SUMMARY
Synopsis of House Bill 484
House Bill 484 (HB484) creates an exemption for tips received as compensation. Currently, for
most types of employees, employers are required to withhold state income taxes in each
paycheck. Income includes compensation received in the form of tips.
The provisions of this bill apply to tax years beginning 2025.
FISCAL IMPLICATIONS
HB484 is estimated to reduce recurring general fund revenue by $21.4 million in FY26. This
cost was estimated using a similar methodology as resources cited in an October 2024
Congressional Research Service publication titled Taxation of Tip Income. Specifically, this
analysis used the RP80 Gross Receipts Tax (GRT) report and retrieved taxable gross receipts by
NAICS codes to identify the share of all business receipts in industries where employees
routinely receive compensation in the form of tips. This is primarily made up of the full-service
restaurant industry. The analysis also made adjustments to include other tipped food service
establishments such as bars and coffee shops and nonfood establishments like barbershops,
salons, spas, hotels, taxis, and many others, following a similar methodology used by a 2017 House Bill 484 – Page 2
report by the Economic Policy Institute.
1
In analysis of a duplicate bill (Senate Bill 285), the Taxation and Revenue Department (TRD)
estimates that the bill would reduce recurring general fund revenue by between $5.6 million and
$11.2 million in FY26. The agency used data from the state of Montana to estimate the average
amount of tip income per taxpayer and used estimates from the Yale Budget Lab for the number
of workers that regularly receive tips. The range provided by the agency was provided to
recognize that some contract workers, like rideshare drivers, may be omitted in their
assumptions.
Taxation and Revenue Department Revenue Impact Estimate*
(dollars in thousands)
Type FY25 FY26 FY27 FY28 FY29
Recurring or
Nonrecurring
Fund
Affected
PIT $0
($5,600.0) to
($11,200)
($5,900.0) to
($11,800)
($6,200.0) to
($12,300)
($6,400.0) to
($12,700)
Recurring General Fund
Parentheses ( ) indicate revenue decreases.
*Amounts reflect most recent analysis of this legislation.
There is a significant difference between LFC and TRD revenue estimates. This analysis presents
the higher of the two agencies’ analyses in recognition of the uncertainty involved in creating a
major new tax expenditure and the potential behavioral effects that may be incentivized. This
analysis notes that a greater share of private industry workers likely work in tipped industries in
New Mexico compared with the region because of the state’s weaker economy and higher
poverty rates. This analysis also notes that comparing the HB484 proposal to Montana’s
exemption may create risks to the estimate for several reasons. First, Montana’s exemption is
limited only to food, beverage, and lodging establishments. This is a smaller subset of workers
than that contemplated by HB484. Second, Montana’s exemption was created in 1983 and
taxpayers had many decades to come into compliance with the provision. By using this as a
comparison, uptake may be artificially low because it assumes a compliance rate from decades
after its initial implementation.
Risks. This estimate assumes taxpayers do not modify their behavior. This is a very
conservative assumption that poses significant risks to the general fund. Currently, about 2.5
percent of all workers are tipped, but about 4 percent of workers earning less than $25 thousand
per year. This analysis assumes the distribution of taxpayers remains constant. New, higher-wage
industries may choose to adopt tips as compensation because of the significant tax incentive.
This could have a significant impact on personal income tax revenues, increasing volatility and
decreasing the reliability of general fund estimates. For example, if an additional ten thousand
workers were to begin primarily receiving compensation through tips, the revenue impact in this
analysis could double.
SIGNIFICANT ISSUES
Policy Considerations. Excluding tip income from taxation would raise after-tax incomes for
1
Shierholz, Cooper, Wolfe, and Zipperer (2017), Economic Policy Institute, Accessed 2/19/2025 House Bill 484 – Page 3
some tipped workers, but not for nontipped workers with similar incomes. Policymakers may
tolerate or approve of such a horizontal disparity if they believe there is a substantive difference
between tipped and nontipped workers.
Workers in tipped occupations who owe no or little income tax would benefit little, if at all, from
excluding tips from income subject to tax. Those who face higher marginal tax rates—generally,
those with higher incomes—would benefit more than those facing lower rates. Creating a
significant exemption for certain types of income creates opportunities for tax avoidance.
Providing a tax advantage to compensation through tips that is not available for other forms of
compensation could make tipping more desirable for workers and employers. All else equal,
workers might prefer receiving their pay in the form of tax-advantaged tips rather than taxed
wages or salaries. Employers, in turn, could better compete for workers by offering
compensation in tips. Customer resistance to broader tipping expectations or worker preferences
for stable levels of income could counteract these incentives.
Design Considerations. This bill proposes an income tax exemption for compensation
received as tips. Under this bill, employers in a predominantly tipped industry would still need to
withhold income taxes in each paycheck, potentially increasing the burden on taxpayers who will
need to properly file their return with the exemption to receive the full benefit of HB484.
Similarly, the bill makes no changes to state payroll taxes, meaning unemployment insurance
taxes will still be withheld from paychecks.
The bill provides an exemption across all industries. This may induce behavioral change,
incentivizing industries where tipping is not currently popular to shift to tipping. This comes
with economic consequences that may be wide-ranging. Exempting tips across all industries
creates more opportunities for potential tax avoidance. An alternative would be to restrict the
exemption to workers in industries where tipping is already common.
The bill would allow this exemption for workers who are self-employed. According to an
analysis from the Yale Budget Lab, tips earned through self-employment make up about 7
percent of all tips. Policymakers may consider whether the provisions of the bill should also
apply to these workers or whether self-employed workers should be excluded to limit
opportunities for tax avoidance.
Lastly, the bill exempts income tax on wages earned as tips across all income levels. An
alternative could be to phase the exemption out with income above a certain threshold. Another
option is a limitation on the total amount of deductible tips. A limitation based on income would
alleviate potential concerns that high-income taxpayers would reclassify income to take
advantage of a tax break meant for lower-income workers. However, doing so would come at the
cost of complexity and higher implicit marginal rates for those in a phase-out rate range.
TECHNICAL ISSUES
TRD analysis notes several technical issues:
This bill does not define “tip” income. As stated in the policy section, there are multiple
types of tips. Commissions or bonuses could be considered “tips” because they are
discretionary and often based on services. This language should be clarified to provide House Bill 484 – Page 4
taxpayers and the department sufficient guidance in implementing. Without that, TRD
and taxpayers may experience a high number of protests and subsequent litigation around
these issues.
The proposed bill to exempt tips from income tax presents challenges for TRD in
verifying the accuracy of the exemption claims. Tips are included in the total wages
reported on both the W-2 and IRS Form 1040, making it difficult to distinguish between
tip income and regular wages. Since tips are not separately stated on either the W-2 form
or Form 1040, it becomes challenging to accurately verify the dollar amount of tips
received by taxpayers. This lack of separate reporting can lead to potential misuse of the
exemption, as taxpayers who do not actually receive tips may falsely claim the
exemption. The proposed exemption is therefore susceptible to tax fraud and evasion.
The absence of a clear and verifiable method to track and substantiate tip income opens
the door for taxpayers to exploit the exemption. To prevent exploitation of the exemption,
it is recommended to implement a certification requirement. This would involve requiring
taxpayers to obtain a certification of their tip income from the employer. However, this
places a burden on the taxpayer, the employer, and TRD.
OTHER SUBSTANT IVE ISSUES
In assessing all tax legislation, LFC staff considers whether the proposal is aligned with
committee-adopted tax policy principles. Those five principles:
Adequacy: Revenue should be adequate to fund needed government services.
Efficiency: Tax base should be as broad as possible and avoid excess reliance on one tax.
Equity: Different taxpayers should be treated fairly.
Simplicity: Collection should be simple and easily understood.
Accountability: Preferences should be easy to monitor and evaluate
In addition, staff reviews whether the bill meets principles specific to tax expenditures. Those
policies and how this bill addresses those issues:
Tax Expenditure Policy Principle Met? Comments
Vetted: The proposed new or expanded tax expenditure was vetted
through interim legislative committees, such as LFC and the Revenue
Stabilization and Tax Policy Committee, to review fiscal, legal, and
general policy parameters.
This proposal was
not vetted through
an interim tax
committee.
Targeted: The tax expenditure has a clearly stated purpose, long-term
goals, and measurable annual targets designed to mark progress toward
the
goals.
This proposal does
not have these
components.
Clearly stated purpose
Long-term goals
Measurable targets
Transparent: The tax expenditure requires at least annual reporting by
the recipients, the Taxation and Revenue Department, and other relevant
agencies
?
It is unclear whether
this expenditure
would be included in
the annual tax
expenditure report.
Accountable: The required reporting allows for analysis by members of
the public to determine progress toward annual targets and determination
of effectiveness and efficienc
y. The tax expenditure is set to expire unless
The bill does not
contain an
expiration date. House Bill 484 – Page 5
legislative action is taken to review the tax expenditure and extend the
expiration date.
Public analysis
Expiration date
Effective: The tax expenditure fulfills the stated purpose. If the tax
expenditure is designed to alter behavior – for example, economic
development incentives intended to increase economic growth – there are
indicators the recipients would not have performed the desired actions
“but for” the existence of the tax expenditure.
It is unclear whether
the proposal is
effective or the most
cost-effective.
Fulfills stated purpose ?
Passes “but for” test ?
Efficient: The tax expenditure is the most cost-effective way to achieve
the desired results.
?
Key: Met Not Met ? Unclear
BG/SL2/rl