States are grappling with whether and to what extent their state tax codes should conform to or decouple from the federal tax provisions of the One Big Beautiful Bill Act (OBBBA).
State conformity is always an issue when Congress enacts a substantial piece of tax legislation (see Adam Thimmesch, Tax, Incorporated: Dynamic Incorporation and the Modern Fiscal State, 54 Ariz. St. L.J. 179 (2022)). The OBBBA presents additional complications because most states have just completed conformity efforts related to the Tax Cuts and Jobs Act of 2017 (TCJA) and many of the OBBBA provisions alter the specific TCJA provisions (see Hellerstein, Hellerstein & Appleby, State Taxation, ¶¶ 7.02, 7.19A).
Two of the OBBBA’s domestic tax provisions are of primary focus: the new “preferred deductions” (i.e., deductions for tip income, overtime income, seniors, and auto loan interest) and permanent bonus depreciation under IRC § 168(k). The preferred deductions should automatically flow through to state personal income tax returns in states that begin with federal taxable income, so this is an area where states are rushing to decouple because of the unanticipated fiscal impact of adopting this deductions. Most states have already addressed state tax conformity to the bonus depreciation provisions that were included in the TCJA but made permanent by the OBBBA, although this is still an area of concern for many states.
- Bloomberg: California’s New Federal Tax Conformity to Remain a Moving Target
- Bloomberg: Delaware Approves Business Tax Decoupling to Avoid Revenue Loss
- Tax Analysts: Colorado Faces $1.2 Billion Revenue Loss From OBBBA Provisions
- Tax Analysts: Nebraska Faces $103 Million Revenue Loss From OBBBA Conformity
- Tax Analysts: State Tax Implications of the One Big Beautiful Bill Act
- Tax Analysts: Should States Fear the OBBBA?
