States’ Response to Trump’s Tax Legislation Varies Widely Across the Nation
In the aftermath of President Trump’s landmark tax legislation, the One Big Beautiful Bill Act, only eight states are currently on track to allow their residents to benefit from popular tax breaks set to take effect in 2026. This development has highlighted significant disparities in how states are approaching these federal tax changes, with political considerations and budget constraints playing major roles in the decision-making process. Treasury Secretary Scott Bessent has publicly criticized several Democratic-led states for “deliberately blocking” popular provisions such as “No Tax on Tips” for service industry workers, “No Tax on Overtime” for linemen and factory workers, and new tax deductions for seniors dependent on Social Security. However, tax experts caution that the situation is more nuanced than simple partisan politics, with both blue and red states carefully weighing their options based on financial realities and existing tax structures.
The landscape of state conformity to these federal tax changes reveals a complex patchwork across America. States like South Carolina, Iowa, North Dakota, Idaho, Montana, Oregon, and Colorado have what’s known as “rolling conformity” that automatically aligns their tax codes with the Internal Revenue Code. A spokesperson for Colorado Governor Jared Polis clarified that claims about Colorado refusing to adopt these tax changes are inaccurate, stating, “Even before H.R. 1, Colorado’s tax code was coupled more than most states by virtue of being one of the few ‘federal taxable income’ states.” Currently, South Carolina, North Dakota, Montana, and Idaho are fully conforming with Trump’s personal tax breaks on qualified tips, car loan interest, overtime premium pay, and the $6,000 enhanced deduction for senior citizens. Meanwhile, Oregon and Iowa will conform to three of these provisions (excluding the enhanced senior benefit), and Colorado will keep the senior benefit while eliminating the overtime premium pay deduction.
The situation in Democratic-led states has drawn particular attention, with states like New York, Illinois, and California declining to incorporate these provisions into their own tax codes. According to reports, these states cite potential budget shortfalls in the billions as a primary concern. Michigan, under Democratic Governor Gretchen Whitmer, stands out as the only state so far to have specifically adopted the tax breaks for overtime wages and tips, while other states like Kentucky and North Carolina are considering similar proposals. New Jersey has indicated openness to some provisions, particularly those not taxing tipped workers. The varied responses highlight the fiscal challenges states face when considering whether to align with federal tax changes that could significantly impact their revenue streams.
Adam Michel, director of tax policy studies at the Cato Institute, explains the technical aspects of this situation: “Some states start with federal taxable income, so most of the new deductions flow through automatically unless lawmakers opt out. Many more states—blue and red—start with adjusted gross income or run their own tax system, which means they don’t pick up these new deductions unless they affirmatively pass a bill to do so.” This structural reality means that for the majority of states, adopting these tax breaks requires active legislative decisions rather than passive acceptance, making the process more complex than simple political positioning. It also explains why 42 states have not automatically conformed to the federal code for these specific breaks, regardless of their political leaning.
Jared Walczak, vice president of state projects at the non-partisan Tax Foundation, emphasizes that this is not a clear partisan divide: “All of this is still up in the air for next year, and it’s not a clear red blue state divide. The tax stuff gets dealt with around the same time that the state budget stuff is getting worked out early in the year in the legislatures.” Walczak has calculated the potential impact on individual states’ tax revenues—with New York, for example, potentially losing as much as $1.7 billion if it were to adopt all the provisions. Such significant financial implications naturally give state leaders pause, particularly in states already facing budget challenges. Walczak notes, “The temporary personal deductions are not very economically efficient, they’re not great tax policy, and they do come at a cost. So states have to evaluate that as they consider whether they want to conform to them, and most states simply won’t do so.”
As we move into 2026 when these provisions are set to take full effect, Americans will likely experience vastly different tax situations depending on where they live. The decisions being made now by state legislatures and governors will have real financial consequences for millions of workers, particularly those in service industries who could benefit from untaxed tips, employees who work overtime, and seniors dependent on Social Security. What’s clear is that the implementation of these federal tax changes at the state level involves complex considerations beyond partisan politics—including each state’s existing tax structure, budget realities, and long-term fiscal health. As state legislatures convene in the new year, many will be forced to make difficult decisions about whether to conform to these federal tax provisions, weighing the benefits to their residents against the potential costs to state coffers.
