Sara Crocker
For a barista like Enzo Rascon, almost half of the money he makes working at a downtown cafe comes from tips.
He works about 25 to 30 hours a week at Songbird Coffee & Tea House. Rascon estimates that at least 40% of his barista income comes from tips. When the cafe is busy, that proportion crests 60%, he notes while sitting on the historic bungalow’s quaint patio.
“We are getting paid minimum wage,” Rascon said, “so living off of tips is how we make a living here.”
Now, a provision in the nearly $18.3 billion state budget headed to Gov. Katie Hobbs’ desk means he and other hospitality workers who earn tips will be able to keep a little more cash in their pockets. On Thursday, Arizona legislators approved a package of bills that will lock in about $1.4 billion in tax cuts over the next four years, including a provision meaning tipped workers no longer have to pay taxes on their tips.
The approval of the budget comes after months of tense negotiations between the governor and the Republican-majority legislature’s leadership. Earlier this year, Hobbs vetoed a Republican-backed bill and budget that included these provisions, sharing concerns about tax breaks for high earners and big business.
Rascon has followed this year’s budget conversations and whether Arizonans should have to pay taxes on their tips and overtime pay. He sees the change in how tips are treated as “very beneficial.”
“We all got to make a living, and if things are rising as far as the cost of living and everything else, then I think it makes sense to go this route,” he said.
What’s changed for tipped workers?
Once Hobbs signs off on the budget for the coming fiscal year, which begins in July, Arizona will have the unique distinction of being the first state to align its state tax laws with the federal changes made last year under the One Big Beautiful Bill Act, legislative Republicans said.
Among those changes to the federal tax rules are an increased standard deduction, increased child care tax credit, no tax on up to $25,000 in tips and no tax on up to $12,500 in overtime pay for an individual or $25,000 for people who file taxes jointly. Several of these tax exemptions, including for tips and overtime, end in 2028.
Even before legislators put these state income tax changes into law, they applied to 2025 state taxes. This year, filers were advised to claim those tax breaks on their Arizona returns, even though none of those provisions were in effect.
Tipped workers make up only about 1.3% of the state’s workforce, based on 2024 figures from the Peter G. Peterson Foundation, a nonpartisan organization focused on financial policy. Yet anyone who makes more than $30 a month in tips can be considered a tipped worker, per federal law. That not only includes baristas, bartenders and servers but also staff at hotels or salons, dog walkers, housekeepers and taxi or delivery drivers.
The state estimates tipped workers won’t have to pay taxes on about $23 million in tips this year and $18-19 million in future years, Dan Bogert, the Arizona Restaurant Association’s chief operating officer, said.
“That’s real money in people’s pockets,” he said.
Yale’s Budget Lab estimates service workers will get about $10 to $45 back on their federal taxes if their income falls somewhere between $21,000 and $76,000. Tipped workers who make more than that stand to see the most benefit, while the lowest earners, those making under $21,000, won’t see any change in their taxes.
Arizona’s already-low 2.5% income tax and small share of tipped workers make these exemptions for tips and overtime “kind of a nothing burger at the state level,” economist Dennis Hoffman said. He’s run the tax revenue forecasting model used by the state’s Executive Budget Office since 1982 and is an economics professor at Arizona State University’s W.P. Carey School of Business.
For those workers, however, Hoffman says the tax exemption is a “bright spot.”
“You don’t have to pay taxes, but I think more importantly, you’re going to want to be thinking about how you maximize tip income over ordinary income going forward,” he said.
The Arizona Center for Economic Progress, a nonpartisan advocacy group, cautions that this short-term relief through $1.4 billion in tax cuts over the next several years could prove costly over time and reduce the tax revenue available to invest in state priorities.
“Arizona has lost nearly $11 billion to tax cuts over the past 30 years, while the state’s tax system remains one of the most regressive in the nation,” the group shared on Friday after the budget’s approval. “The state cannot keep cutting the revenue needed to fully fund child care, public K-12 education, health care, housing, water, and food assistance and still expect to build a strong, competitive economy. “
The money Rascon, the Songbird barista, earns from his tips helps him continue living in downtown Phoenix.
“Not having to worry about those taxes obviously would — as cost of living is rising here — that would help a great deal,” he says.
Sara Crocker
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