Skeptics say Kansas Senate bill exempting tips from state income tax doesn't go far enough
Nathan Kessler, tax policy adviser at Kansas Action for Children, said a Kansas Senate bill removing tips from calculations of state taxable income would lead to inequities in the workplace and have a limited impact economically. (Kansas Reflector screen capture of Legislature's YouTube channel)
TOPEKA — Kansas Restaurant and Hospitality Association president Adam Mills appreciated thinking behind a Kansas Senate bill exempting tips from state income taxes because it could put cash in the pocket of some food service industry employees.
Mills just didn't believe the idea went far enough to strip away tax or regulatory barriers undermining the societal value placed on work. The state should move to exempt overtime pay from income tax, he said. Kansas needed to embrace reform that helped youth to more easily join the workforce. The bill before the Senate Assessment and Taxation Committee should be amended to address the unfairness of singling out certain employees at a restaurant for the tax break, he said.
'Work is a good and decent virtue that leads to personal integrity and societal respect,' Mills said. 'Serving and bartending is a legitimate profession. The work they do is important, but they can't do it alone. It's a total team effort to provide great food and service for our dining public.'
Under Senate Bill 277 introduced by Sen. Caryn Tyson, R-Parker, the annual cost of the state income tax exemption would be an estimated $13.2 million. That figure could change if the bill was amended or if taxpayer behavior shifted so more Kansans worked in tipped positions.
The proposed tax break would apply to tips reported on federal tax returns, which were the basis for determining state taxable income for Kansans. The state tax benefit would start in the 2026 tax year and an individual would be limited to a $25,000 exemption annually.
The Internal Revenue Services views all tips as income subject to taxation. President Donald Trump has endorsed the idea of repealing the federal tax on tips. There have been conversations in Congress about exempting tips, but the new U.S. House budget resolution didn't mention tips or overtime compensation.
U.S. Sen. Roger Marshall, R-Kansas, predicted a federal exemption could pass Congress by June as part of the president's agenda to drive domestic prosperity. A federal tax break might be included in future legislation, but absence of progress on the national level led states to consider exempting tips from state taxable income.
During the Kansas Senate committee's hearing on the bill Monday, no one offered testimony in favor of the legislation. Kansas Action for Children did raise concerns.
Nathan Kessler, tax policy adviser at Kansas Action for Children, said economists and tax experts across the political spectrum regarded eliminating the income tax on tips as poor public policy. He said issue of fairness existed because tips provided a waitress would be exempt, while tips to a teacher wouldn't. The distinction was likely to compel lobbyists for all sorts of industries — accountants, doctors to educators — to seek inclusion of their clients in the tip exemption, he said.
'Kansas Action for children recognizes the real need for cost-of-living relief, especially for low-income households,' Kessler said. 'If the goal is to put more money in the pockets of tipped workers there are much better ways to do that. The most efficient would be to raise the minimum wage for those workers in Kansas.'
In February, Gov. Laura Kelly and Democratic leadership in the House and Senate proposed the Legislature raise the state's minimum wage to $15 per hour. The $7.25 minimum wage in Kansas hasn't been increased since 2010. In Missouri, the minimum wage stands at $13.75 per hour.
Kessler said the Senate legislation would capture about 2.5% of the state's workforce if every bartender, waiter, food server, host, hairdressers, stylist, cosmetologist, manicurist, pedicurist and concierge was included. The Kansas Department of Labor estimated the median annual income for these Kansans was approximately $29,350.
'Many of these workers do not actually have a tax liability or it is so small that exempting their tipped income will offer little meaningful relief,' Kessler said.
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