Iowa House Democrats double down on proposal to end taxes on tips, overtime pay

DES MOINES — Iowa House Democrats highlighted their plans to end state taxes on tips and overtime pay as the session’s second legislative deadline approaches at the State Capitol this week.

During a news conference Monday morning in downtown Des Moines, multiple House Democrats spoke about why these tax exemptions are needed for working-class Iowans.

“We want to make sure that money goes back to their pockets so they can focus on what we all consider the American dream, the Iowa dream, raising their families, owning a home and owning reliable transportation to get to and from work,” said Democratic Rep. Eric Gjerde, of Cedar Rapids.

Catherine Pollard, a student at Drake University, works around 50 hours a week in jobs at a restaurant and as Democratic Rep. Aime Wichtendahl’s legislative clerk. She said lifting the taxes on her tips from the restaurant would help her develop stronger financial security.

“The people within the service industry are hardworking and dedicated, many of whom are working on top of an already very busy schedule, such as myself, especially in an industry that fluctuates as much as a service industry does,” Pollard said.

Under House File 293, all earned income from cash tips would be exempt from Iowa’s 3.8 percent flat income tax rate.

Iowa’s minimum wage is set at the federal minimum 0f $7.25 an hour. For tipped workers who make more than $30 in tips per month, the minimum wage is $4.35 an hour.

Nationally, roughly 4 million workers, or less than 3 percent of the U.S. workforce, regularly earn tips through their jobs, according to the Budget Lab at Yale University.

Proposals to lift taxes on tips have garnered bipartisan support, with both 2024 presidential candidates, now President Donald Trump and former Vice President Kamala Harris, backing the proposal on the campaign trail last year.

But the proposal has caused concern among nonpartisan economists who say a federal tax exemption for cash tips could have negative impacts on the federal budget and broader economy.

According to the Committee for a Responsible Federal Budget, lifting the federal tax on cash tips would reduce federal revenues by $150 to $250 billion over the next decade.

With Democrats’ bill stalled,

Democrats' legislation, introduced Feb. 10, has not received a subcommittee assignment and likely won’t move forward as Republicans hold supermajorities in both chambers and control the legislative agenda.

However, the issue may still move forward, as House Republicans on Feb. 6 introduced an identical bill, House File 268, which advanced out of subcommittee in February.

One of bill’s sponsors, Republican Rep. David Young of Van Meter, said lawmakers will have a more pronounced discussion on the legislation near the end of this year’s session.

“We believe that folks out there working hard in service industries, especially, deserve to keep more of what they make,” Young told the Gazette-Lee Des Moines Bureau. “We want to be helpful, and we welcome anybody in supporting that idea.”

Lifting taxes on overtime pay

Democrats also used Monday’s news conference to highlight their proposed legislation, House File 360, to exempt overtime pay from state income taxes. It was introduced Feb. 12, but has not received a subcommittee assignment.

“What all this legislation is going to do is provide a break to working people,” Democratic Rep. Sami Scheetz, of Cedar Rapids, said during the news conference. “If we're constantly going to pass tax bills that give giveaways to rich people and wealthy corporations, again, it's time that working people got a break too.”

Republican Rep. Michael Sexton of Rockwell City on Jan. 22 introduced an identical bill, House File 110, which he says has a stronger chance of being picked up in the House than in the Senate.

Sexton, whose district includes ethanol plants and a large number of construction jobs, said lifting taxes on overtime pay is a top issue he’s heard about from his constituents.

“There's such a shortage of employees in rural Iowa, and just all of them said ... ‘If there's one thing you could do for us, it would be get rid of that tax on overtime, because when we get our overtime check, almost all of it gets taken away in taxes,’” Sexton said. “It's a real disincentive to help out your company.

This story has been updated to correct the date a bill was introduced.