Sen. Suzette Valladares, R-Acton, shared her personal connection to a bill she co-authored during its April 23 hearing in front of the Revenue and Taxation Committee in Sacramento.
When she was a bartender at Houston’s, she relied on customers’ gratuities to make ends meet, whether it was a car payment or rent, she said.
Now she’s working on a bill, along with Sen. Rosilicie Ochoa Bogh, D-San Bernardino, to keep Californians working in the service industry from having their tips taxed. It was approved by the committee unanimously.
Senate Bill 17 enacts an exclusion from income for state tax purposes for tips, defined as any gratuity provided by a customer or client of the employer’s business, according to a legislative report. The exclusion would start Jan. 1.
“I can just tell you that this bill will go a long way to impact the people who need the help the most,” Valladares said at the hearing. “And it’s also bipartisan,” she said, mentioning how both presidential candidates made statements of support for similar measures during their campaigns.
“If Congress enacts a similar piece of legislation, we’ll work together again on that in the future,” said committee chair Jerry McNerney, D-Stockton, in supporting the bill. It was re-referred to the Appropriations Committee on Tuesday, according to the Legislature’s official website. There was no hearing date listed.
“I’m grateful to the committee chair, Sen. McNerney, and the other members for their support of this important tax relief measure for California’s service workers,” Valladares said in a statement after the bill moved forward. “During my 20s, I was a struggling student working as a waiter to make ends meet. I know firsthand how hard it is to earn a living in the service industry. These hard-working Californians should be able to keep more of what they earn — it’s time to ease their tax burden and help them get ahead.”
In addition to bipartisan support and from business groups like the California Restaurant Association and the Valley Industry and Commerce Association, the bill had no registered opposition.
The idea behind the law is to provide help to service-industry workers who comprise about 2.5% of the workforce but “who are disproportionately of color and female,” according to data shared at the hearing.
Tipped workers are also more likely to be single parents and nearly three in 10 women who earn tips have a child under 18. The law also would provide more help to a younger demographic: The typical tipped worker also is a full 10 years younger (31) than the median non-tipped worker, and one-third are younger than 25 years old, which was mentioned by Scott Kaufman, legislative director for the Howard Jarvis Taxpayers Association.
“The overrepresentation of vulnerable groups makes the need for this bill clear,” he said. “A line exclusion for the income for state tax purposes for tips will go a long way to help these predominantly young women of color take more money home and save for the future.”
There was an initial discussion of the direct cost and impact for the measure, which is likely to get closer analysis in the Appropriations Committee. The Franchise Tax Board gave an estimate for the direct potential revenue impact if the law passes — state revenue losses of $330 million in 2025-26 and $340 million in 2026-27, based on the committee’s legislative analysis.
The report also stated income from tips is already a widely underreported source, and this could make things worse.
“Tips have always been considered income, even though enforcement has been ineffective,” according to a report presented to the committee. “The Joint Committee on Taxation estimated the tips tax compliance rate for 1981 to be as low as 16%, noting that the only type of income with a lower compliance rate was illegal income at 5%.”
The law could also spur an incentive to further skirt tax rules.
“Taxpayers can change behavior in response to changes in tax law, and an exclusion is the most powerful change because taxpayers do not include the excluded income on their returns,” according to comments in a section of the report titled “Being Shifty.”
“Under SB 17, workers, employers, consumers and tax planners would have a significant incentive to reclassify income from taxable wages and salaries to tax-excluded tips. Instead of $1,000 to prepare a will and trust, an attorney could charge $1 for the trust agreement with a $999 tip; a tax preparer could do something similar when preparing returns.”
