Months before President Donald Trump rolled out his “no tax on tips” policy, Illinois Gov. JB Pritzker signed a law that would impact customers who tip using credit cards; small business owners across the state tell the Washington Reporter that they’re concerned about being “guinea pigs” while bigger businesses will be able to sort through the chaos.
Illinois passed the Illinois Interchange Fee Prohibition Act (IFPA), a first-of-its-kind law that prohibits credit card companies from charging processing fees for payments meant as tips and taxes, earlier this year. The provision was intended as a handout to Illinois merchants who, in theory, would have lower credit card fees in order to offset further tax hikes in the state’s budget, but it has already resulted in confusion and a legal mess, and it has become a headache for the state, business owners, and customers.
The untested measure means that if customers go to a restaurant and want to tip $20 on a $100 tab, they will only be able to use their credit card for the $100 and will be forced to leave $20 in cash as the tip — at a time when customers and restaurants across America are moving away from cash transactions completely.
A Senate Judiciary Committee staffer told the Washington Reporter that “the Illinois credit card debacle is probably driven, in part, by [Illinois Sen. Dick Durbin (D.)], who wants nationwide price caps on credit cards,” adding that “the fact that the state is spending millions of dollars and customers are worse off is a good reminder that when the government fundamentally changes payment systems it usually makes things worse.”
Beyond the compliance challenges, a constellation of local and national banking associations recently filed a lawsuit arguing that the Illinois law violates the National Bank Act (NBA), a federal law that prohibits states from interfering with national banks’ operations. The NBA stops states like California — and Illinois — from setting progressive banking policies for the rest of the country.
“The IFPA significantly interferes with multiple federally granted powers of national banks, including ‘receiving deposits,’ ‘loaning money on personal security,’ processing credit and debit card transactions, and processing banking and financial data,” the lawsuit reads. “It is therefore invalid.”
While some large national merchants advocated for this law, small business owners in Illinois told the Reporter that the move would be a costly, compliance nightmare.
“As a business owner, I am very concerned about the costs of this implementation on small businesses and that the benefits will only go to big box retailers,” Alex Cabrera, the owner of Lalo’s Restaurant on Maxwell Street in Chicago, told the Reporter. “This law is unnecessary and no one knows of any way to implement it.”
Julio Martinez, who runs La Justicia, a multigenerational Mexican restaurant in Chicago, told the Reporter that Illinois’s business climate has shifted from unfriendly to hostile over the more than three decades that he’s run his family’s restaurant. He has little faith in a Pritzker administration to implement pro-small business policies.
In the years after Martinez started supporting Republicans, the State of Illinois suddenly commenced auditing his business. “I’m being audited by the state of Illinois,” he said. “It started three years before Covid, and it continued for three years during Covid.”
The problems already evident in the IFPA are easily translatable if other states, or the federal government, try to implement a similar policy. “This has not been implemented anywhere in the world, putting Illinois in a vulnerable position to be the guinea pig of a new system that has yet to be created,” Jose Garcia, the president of Northwest Community Credit Union in Illinois, told the Reporter. “Consumers and businesses in Illinois should be concerned about what the transaction experience will look like from a security and privacy standpoint.”
Within Illinois, Pritzker faced predictable condemnation from his political foes, one of whom told the Reporter that the multibillionaire Hyatt scion is treating “the Illinois budget like you would expect a billionaire who has never had to worry about how much he pays in taxes.”
“Under the Pritzker regime, Illinois budgets have grown year over year and he gaslights Illinois families by claiming his billion dollar tax hike is somehow a tax cut,” Kathy Salvi, the chair of the Illinois Republican Party, told the Reporter. “This is what you get with Democrats — more taxes and more spending at the expense of your bank account.”