Proposed Tip and Overtime Tax Exemption Faces Hurdles
Wisconsin workers earning tips or overtime pay could see lower tax bills, though the policy would cost the state $2.7 billion.
Updated on Oct. 15, 2026 in Taxes
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A new report from Forward Analytics estimates that exempting tips and overtime from Wisconsin income taxes would deliver $2.7 billion in tax cuts to workers from 2028 through 2037. The policy would disproportionately benefit specific wage earners while leaving many low-income residents without relief.
Why it matters
Proposed tax exemptions for tips and overtime would fundamentally change how the state collects revenue, resulting in a $2.7 billion decrease in funding over a decade. Whether this shift provides meaningful relief depends on an individual's specific compensation structure rather than their overall income level.
Forward Analytics estimates a $2.7 billion loss in state income tax revenue from 2028 to 2037 under the proposal. This change would offer a $716 annual tax savings for a waiter earning $40,000 with $15,000 in tips, while workers with base salaries but no tips would see no benefit.
The players
Forward Analytics
A research entity that tracks fiscal trends and state revenue projections.
The details
The proposal would exclude tip income and overtime pay from taxable income calculations used for state taxes. Because the benefit is tied directly to the source of income rather than total annual earnings, taxpayers with similar salaries will see vastly different results. For example, an office worker earning $40,000 without tips would receive no tax break, while those currently owing no state income tax would see little to no advantage.
Timeline
2028-2037: The projected 10-year period for the estimated tax revenue loss.
Money Landscape
This proposal marks a significant departure from Wisconsin's existing income tax structure by carving out specific types of earnings for exemptions. It sits within a broader discussion regarding how states adjust tax policy to address changing labor market conditions.
Households should evaluate whether a significant portion of their income comes from tips or overtime to understand how this policy might affect their future tax bills. Consult with a qualified tax professional to review your personal income sources and potential tax liability.
The takeaway
Tax policy changes based on income source can create unequal outcomes among workers with similar take-home pay. Review your pay stubs to identify how much of your total annual compensation is classified as tips or overtime, as this will determine your eligibility for potential future relief.
Further reading
For more on how state changes impact your bottom line, visit our guide on Taxes.
Source note: This article includes information reported by Wbay.
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Should states exempt tips and overtime pay from income taxes to help workers?
