WASHINGTON — President Trump’s One Big Beautiful Bill was pitched as a direct boost to take-home pay, wiping out federal taxes on tips, overtime earnings and other income. But in many Democratic-led states, workers are still seeing tax collectors take a cut.
The decision by several blue states not to mirror the federal changes has created a state-by-state tax maze, leaving servers, bartenders, retirees and hourly employees facing sharply different bills depending on where they live and work.
The Post reviewed state tax rules to identify where Americans are least likely to receive the full benefit of Trump’s marquee legislative achievement.
Connecticut, Minnesota, New Mexico, Rhode Island and Vermont stand out as the most aggressive holdouts. Each taxes every major category of income covered by the law, which Trump signed on July 4, 2025.
Those five states not only maintain some of the steepest state tax burdens on income Congress sought to make tax-free, but they also declined to participate in the Education Freedom Tax Credit program established under the sweeping legislation.
Other states, including New York, have opted for a more selective strategy, accepting certain federal tax breaks while leaving others out of their own state tax codes.
Tax on tips
As of this month, 31 states and Washington, DC, continue to tax tips.
For workers in states that decoupled from the federal deduction, state taxes can eat up as much as 10% of their tip income. In Minnesota, which uses a progressive individual income tax system, rates range from 5.35% to 9.85%.
If a Minnesota server makes $70,000 a year — $25,000 of that coming from tips — they are subject to a 6.8% individual tax rate. The server loses an estimated $1,700 of their tips, due to the state declining to conform to the federal tax break.
Meanwhile, New Mexico continues to tax tips despite raking in revenue from the oil and gas industry, the state’s restaurant association fumed.
“Continuing to tax tips is out of step with the needs of service workers, and underscores a broader opportunity for the state to reconsider income tax relief for all working residents,” the New Mexico Restaurant Association said.
“Under Democrat leadership, New Mexico is one of the most poorly managed states in the country, with one of the worst taxpayer returns on investment in the nation, all while state spending and taxes continue to rise,” said Republican Party of New Mexico interim chairman Mike Nelson, adding that the party has “made it more difficult for those who need [the tax breaks] most.”
In states that did conform with the federal standard, like Idaho, service workers who make an average of $25,000 in tips each year are seeing an extra $1,325 in their pocket.
Tax on Social Security benefits
Trump’s bill expanded tax relief for many older Americans via a temporary deduction of $6,000 that Americans 65 and older can claim through the 2028 tax year.
But not all states have done the same.
Eight states still fully tax Social Security benefits: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont.
“For seniors living on fixed incomes, every dollar matters,” a spokesperson for the nonpartisan Senior Citizen League told The Post. “Many are dealing with higher costs for living, healthcare, groceries, and other everyday expenses.
“When some states don’t adopt the same tax relief that’s available at the federal level, it can leave retirees with a higher tax bill simply because of where they live,” the rep added.
“Giving seniors the same tax relief at the state level would help them keep more of the income they’ve worked their entire lives to earn and make it a little easier to keep up with the rising cost of living.”
In Vermont, the Social Security income tax exemption applies only to individuals earning under $55,000 a year, or couples making under $70,000. In contrast, the federal law starts to phase out the deduction for individuals making $75,000 per year.
Tax on overtime
Trump’s law also eliminated federal income taxes on qualifying overtime pay, but 30 states and DC still impose state-level taxes on overtime pay.
Under the provision, an individual can deduct up to $12,500 of qualified overtime pay from federal taxes. In states that have conformed, like Michigan, individuals can deduct the same amount from their state tax bill through 2028.
Labor groups have also argued that the federal tax deduction should recognize the Fair Labor Standards Act’s overtime rules for certain transportation workers, who in some cases are not eligible for overtime pay unless they work more than 55 hours in a week, rather than the standard 40 hours
“Every tax season, hardworking Americans employed in certain industries, including transportation, are forced to sacrifice portions of their overtime pay towards state and federal taxes,” said Transportation Trades Department President Greg Regan, who runs America’s largest transportation labor federation. “Simply put, that’s not fair.”
“For many hourly workers, this tax relief could total up to thousands of dollars staying in their pockets.”
Education Freedom Tax Credit
The Big, Beautiful Bill created a federal tax credit aimed at expanding school choice through scholarship organizations – but states need to opt in. So far, 29 states have done so.
The program allows a taxpayer to contribute up to $1,700 to a qualified scholarship-granting organization and receive a full refund. Donors from a state that opts out of the program can still contribute, but the money would go to benefit students in other states.
“It’s really a shame of how it’s going to impact the students in the state that don’t opt in, because you’re going to have contributions from individuals that could otherwise help the kids in your state going elsewhere,” said Matt Frendewey, vice president of strategy at Yes. Every Kid., an advocacy group focused on US education policy.
Tommy Schultz, CEO of the American Federation for Children, a school-choice advocacy organization, agreed that the program is a “no-brainer,” and that “governors who remain on the sidelines should listen to their constituents and opt in.
