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Over the last few years, the federal government has shown an increasing interest in credit cards and points and miles. Much of this originated with the proposed Credit Card Competition Act, including attempts to attach it to other pieces of legislation.
While these efforts at the federal level haven’t led to any concrete action (yet), state governments have recently opened a new front in the battle over the credit card transaction process.
Here’s what you need to know about current efforts underway across the U.S. to implement legislation that could upend the way you pay for goods and services.
Some background
First, a quick primer on the mechanics of a credit card transaction.
Every time you use a card to pay for something online or in a store, the merchant is charged a small percentage of the purchase amount — which averages out to roughly 2% — to process that transaction. This is typically referred to as the interchange fee, which is shared among the card’s issuing bank, the credit card payment network (most often Visa, Mastercard or American Express) and the merchant processing institution.
All parties use this interchange to safeguard the purchase, prevent fraud and fund rewards programs by issuing points, miles or cash back.
As a consumer, you’re protected from unauthorized charges, and you’re the one choosing the card (and network) for the purchase. Meanwhile, small businesses enjoy a nearly frictionless transaction process, with minimal risk of loss or theft — a major concern when handling cash transactions.
Unfortunately, some local jurisdictions are considering new laws that would drastically change the experience for customers and businesses — and one has even become law.
Proposed legislation in Washington, DC
The newest battleground is our nation’s capital, where District of Columbia council members are pushing for Bill 26-138, which would prohibit interchange fees on sales taxes and gratuities. This mirrors the approach taken in Illinois, where the state legislature passed a budget bill in 2024 that included a similar provision (now set to take effect July 1, 2026, after the state’s general assembly delayed its implementation).
On the surface, it may seem right to exempt these items from interchange. After all, a business is collecting them on behalf of others — whether it’s a taxing authority or a tip-eligible employee.
Unfortunately, the logistics of implementing such a proposal are incredibly complex, and the burden it would impose on small businesses has the potential to be massive.
Would merchants take on costly upgrades to new processing hardware and software in order to split up a purchase into one part that’s exempt from interchange and the other part that’s not exempt? Would these businesses collect interchange on the entire transaction and then request a refund for specific components?
Not surprisingly, large retailers would be the biggest beneficiaries of these policies, as they have a large volume of transactions and massive accounting teams to help implement such a complex new system (and cover the costs associated with it).
In fact, a study (PDF link) conducted by the Electronic Payments Coalition found that the 40 largest retailers in Illinois would take home nearly 40% of any interchange savings realized with the bill. The roughly 1.3 million small businesses in the state would be left to deal with the headaches of implementation while missing out on any meaningful savings.
But the party that would feel the brunt of the new law in Washington would likely be the average consumer.
Impact on the consumer
Under the proposed Washington bill, what was previously a simple swipe of a credit card could turn into a multistep process, as small businesses separate one transaction into two (or more) — one for the goods or services being purchased and the other(s) for taxes and gratuities, as applicable. They may even require two different payment methods for each.
For example, a restaurant owner can elect to separate taxes and tips from the rest of the meal, which could mean you’d pay for your food and drinks with a card and fork over cash (or write a check) for the rest.
There are also privacy concerns with this type of legislation, since a merchant would need to share additional details about every one of your purchases to ensure compliance with the bill. If a merchant decides to itemize transactions in their system for the purposes of avoiding interchange on taxes and tips, what was previously an entirely private transaction could suddenly be shared with other parties.
As of now, only Illinois has passed such a bill — nearly 30 other states have rejected similar measures due to the impact on consumers, small businesses and the broader economy. However, there are still some that remain under consideration — including in California, New York, North Carolina and Texas.
Bottom line
While efforts continue at the federal level to regulate credit card processing, new initiatives are popping up within state and local governments as well. One that would exempt taxes and tips from interchange fees is set to take effect in Illinois on July 1, 2026, while another proposal — Bill 26-138 in Washington, D.C. — would impose similar requirements in the nation’s capital. In both instances, implementing the laws as written would introduce confusion for consumers and add substantial burdens to small businesses.
And while many states have moved on from such proposals, other jurisdictions are still considering new laws that would affect the very basics of how you pay for your purchases.
But regardless of the locale for these regulations, they all have some important similarities. The biggest beneficiaries are the largest retailers, and the implementation would add friction to a process that safeguards your data and allows you to earn rewards on every swipe of your credit card.
If you want to make your voice heard, you can share your thoughts on these proposed bills with your elected representatives at the following links:
