Michael J. Bologna (Bloomberg Law): More States Expected to Decouple From Trump’s Tax-Cutting Agenda

Lawmakers in Delaware, Illinois, Michigan, Pennsylvania, and Rhode Island took on a task that most states ignored last year: passing legislation to separate from the tax-cutting features of President Donald Trump’s signature 2025 law.

Now governors and legislators in nearly two dozen states are examining the strategies adopted by these early responders, acknowledging they also must confront the revenue challenges posed by the president’s tax-and-spending law from July.

Decoupling legislation takes on particular urgency in the states that automatically adapt to the latest version of the federal tax code, known as “rolling conformity.” Static and hybrid conformity states, which align their laws to the federal code at a fixed date, will have more time to weigh their options.

Several features of Trump’s law expand corporate income tax breaks that flow down to the states. Many states will decouple from provisions that permit businesses to write off their capital investments faster, lowering their federal taxable income, Jamie Yesnowitz, state and local tax partner at Grant Thornton’s Washington National Tax Office, said.

Key provisions include: full restoration of bonus depreciation for machinery and equipment under Internal Revenue Code section 168(k); a higher cap for small business expensing under section 179; restoration and expansion of research and development expensing under section 174; and new cost recovery for certain business structures under section 168(n).

The new federal law, however, creates an opportunity for states to grow their revenue by taxing a larger portion of international corporate income. The law eliminates the global intangible low-taxed income regime, or GILTI, and transitions to a new net controlled foreign corporation tested income regime, or NCTI.

States adopting this change could combat tax base erosion caused by global enterprises shifting their profits to foreign jurisdictions, said Brian Hamer, senior counsel at the Multistate Tax Commission.

On the personal income tax side, states must decide whether to follow new federal deductions on tipped wages and overtime.

The Institute for Tax and Economic Policy recently estimated this would cost the 15 states now linked to these deductions roughly $1 billion in 2026. “These deductions are an ineffective way to support low- and moderate-income workers and will place more strain on state revenues that fund services that those workers need and want,” the group said.

Several jurisdictions acted early, decoupling from the most costly features of Trump’s law.

• Washington, DC decoupled from 13 federal tax code changes, including the business tax breaks and the deductions for tipped and overtime wages.
• Delaware lawmakers convened a special legislative session in November to decouple from bonus depreciation and accelerated expensing rules.
• Illinois enacted legislation in December decoupling from bonus depreciation, but conforming to foreign income rules under NCTI.
• Michigan Gov. Gretchen Whitmer signed a budget bill that removed the state from most of the corporate tax breaks, but conformed to the federal deductions for tipped and overtime wages.
• Pennsylvania decoupled from most of the business tax breaks under a fiscal 2026 budget deal, worried the provisions would cost the state about $700 million.
• Rhode Island decoupled from most of the personal and corporate income tax breaks.