California Lawmakers Reject Key Tax Relief Bills Amid Budget Deficit

On Friday, May 23, 2025, the California State Legislature abruptly shelved hundreds of proposed bills — including several aimed at providing tax relief to working families and low-income service workers. The cuts came during the state’s routine “suspense file” review process, where bills with fiscal impacts are decided behind closed doors in a single session.

With California facing a $12 billion budget shortfall, fiscal discipline won out over tax breaks — at least for now.

What Is the Suspense File?

The suspense file is a legislative procedure used by California’s Assembly and Senate Appropriations Committees. Bills that would cost the state over $150,000 are held until the budget outlook becomes clearer.

In this round, over 900 bills were evaluated, and many were shelved indefinitely — including high-profile tax proposals.

Two Major Tax Proposals That Were Rejected

1. State Income Tax Exemption for Service Worker Tips

A bill proposed exempting tips earned by service workers — such as restaurant staff, barbers, and hotel employees — from state income tax.

• Modeled after the federal “No Tax on Tips Act”

• Intended to boost take-home pay for hourly workers

• Rejected without debate

2. Tax Credits for Parents of Young Children

Another proposal sought to offer targeted tax credits to parents raising children under the age of five.

• Designed to offset the high cost of childcare

• Would have delivered relief during a time of rising inflation and stagnant wage growth

• Also cut in the suspense file session

  
  

Why the Legislature Said No

California’s budget deficit loomed over this decision.

Governor Gavin Newsom’s administration recently revised the deficit projection to $12 billion, citing falling tax revenues, volatile capital gains, and rising public service costs. As a result:

• Lawmakers were reluctant to introduce new tax expenditures

• Budget committee leaders prioritized cost containment over equity-based tax reform

• Bills lacking clear funding offsets were deemed fiscally irresponsible

  
  

Reactions from Advocates and Critics

Supporters of the bills — including labor unions and progressive tax policy groups — expressed frustration, calling the cuts “short-sighted” and “out of touch with working Californians.”

Opponents, particularly fiscally conservative lawmakers, argued that:

• Exempting tips would further reduce revenue without guarantees of wage increases

• New tax credits require long-term funding that the current budget can't support

  
  

What This Means for Tax Professionals

• Service industry clients in California will not see state-level tip exemptions this year

• Family clients should not expect additional child-related state tax credits for 2025

• Advisors should factor in delayed tax relief when forecasting or planning for California-based filers

  
  

These developments also reflect a broader national theme: states under fiscal stress are pulling back on targeted tax relief, even when federal models appear supportive.

Final Takeaway

The failure of these bills underscores a key reality for 2025: State tax relief proposals must now compete with budget pressures, not just politics.

At Bizora AI, we continue to track how local tax policies shift in real-time — so you and your clients can make smart, informed decisions across jurisdictions.