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House Finance and Taxation committee recommends 'do not pass' on bill to exempt tips from state income tax
Summary
A House committee voted to recommend that House Bill 1324, which would have excluded cash and noncash tips from North Dakota state income tax, receive a "do not pass" recommendation after members raised revenue and implementation concerns and noted possible overlapping federal action.
House Finance and Taxation Committee Chairman Hedlund on Jan. 21 opened a hearing on House Bill 1324, legislation by Representative Johnston that would eliminate North Dakota state income tax on cash and noncash tips received by employees of food and beverage service establishments.
Representative Dan Johnston, sponsor of the bill, said eliminating the state income portion of tax on tips would provide tax relief to service-industry workers and could help recruit and retain employees in the hospitality sector. "Tips generally make up the bulk of their income during these difficult economic times," Johnston said in testimony to the committee.
The bill drew questions about its fiscal impact and interaction with federal proposals. Matt Pearl of the Office of State Tax Commissioner told the committee that if Congress and the president exempted tips at the federal level, that change would feed through to the starting point of the North Dakota return and would make a separate state measure redundant: "It would be excluded from the starting point of the North Dakota return computation," Pearl said. He also noted the department could not reliably estimate state revenue effects because tips and taxpayers' filing situations vary widely.
Committee members expressed concern that removing the state tax now could create confusion if the federal government acts differently or later. Representative Vista said the practical savings for many servers could be negligible because of the state tax structure and existing zero-rate bracket for lower incomes. Representative Olson moved that the committee recommend a "do not pass" on HB 1324; Representative Anderson seconded the motion.
On a roll call the committee approved the do-not-pass recommendation. The motion carried with the committee reporting a majority yes vote and one dissenting vote by Representative Tholman. The committee chair closed the hearing on HB 1324 after the vote.
With the do-not-pass recommendation, the committee effectively advised the full House against advancing the bill without further amendment or changed fiscal circumstances. Sponsors and members mentioned that if federal law changes, that could moot the state proposal and the tax department would administer whatever the law requires going forward.
