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States Grapple with Trump’s Tax Cuts as Legislative Sessions Approach
As state lawmakers prepare to convene across the country in January, they face a pressing decision: whether to align state tax codes with the sweeping federal tax cuts implemented by the Trump administration.
The federal tax package, signed by President Donald Trump on July 4, includes significant deductions for tips, overtime wages, automobile loans, and business equipment purchases. This $4.5 trillion tax cut over 10 years presents states with complex financial and political considerations.
In some states, these federal tax breaks will automatically apply to state income taxes unless legislatures explicitly opt out. However, in many others, state tax codes operate independently, requiring legislative action to incorporate the changes. The result could create a confusing scenario where workers receiving tips or overtime pay would owe no federal tax on those earnings but might still face state taxes.
Treasury Secretary Scott Bessent has urged states “to immediately conform” to the federal tax cuts, accusing states that haven’t done so of “political obstructionism.” Bessent argued that failing to align state tax codes would force “hardworking Americans to shoulder higher state tax burdens, robbing them of the relief they deserve.”
However, adoption presents significant financial challenges for state budgets. States that embrace all of Trump’s tax cuts could provide hundreds of millions in annual savings to certain residents and businesses, but potentially at the expense of state services and fiscal stability. This strain comes as states already face higher costs from new Medicaid and SNAP food aid requirements included in the same federal legislation.
“States in general are approaching this skeptically,” said Carl Davis, research director at the nonprofit Institute on Taxation and Economic Policy.
For the tip and overtime tax exemptions, the current landscape is particularly complex. Due to differences in state tax laws, these federal tax breaks would have automatically carried over to just seven states: Colorado, Idaho, Iowa, Montana, North Dakota, Oregon, and South Carolina. However, Colorado opted out of the state tax break for overtime shortly before the federal law was enacted.
Michigan has taken the lead as the first and only state so far to actively opt into the tax breaks for tips and overtime wages, though this will only take effect in 2026. According to the state treasury department, the overtime tax exemption is projected to cost Michigan nearly $113 million, with the tips tax break adding about $45 million during the current budget year.
Michigan lawmakers offset these costs by decoupling from five federal corporate tax changes estimated to have reduced state revenues by $540 million this budget year. Republican state Rep. Ann Bollin, chair of the Michigan House Appropriations Committee, explained the balancing act: “The best path forward is to have more money in people’s pockets and have less regulation — and this kind of moved in that direction.”
Arizona may be among the next states to act. Democratic Gov. Katie Hobbs has called on lawmakers to adopt the tax breaks for tips, overtime, seniors, and vehicle loans, while also increasing the state’s standard deduction for individual income taxpayers. Republican state House leaders have indicated they’re ready to pass these tax cuts when their session begins January 12.
On the corporate side, lawmakers in Delaware, Illinois, Pennsylvania, Rhode Island, and Michigan have passed measures blocking some or all of the corporate tax cuts from taking effect in their states. In Illinois, a new law decoupling from a portion of the corporate tax changes could save the state nearly $250 million, according to Democratic state Sen. Elgie Sims, chair of the Senate Appropriations Committee.
Illinois Gov. JB Pritzker cited budget concerns for rejecting the corporate tax cut provisions, noting that states already stand to lose money from other requirements in Trump’s legislation. “The decoupling is an effort to try to hold back the onslaught from the federal government to make sure that we can support programs,” Pritzker said during a December event.
State lawmakers face time constraints if they wish to retroactively implement these changes for 2025. Quick action would be needed to update tax forms before filing season begins, though states could also choose to apply the changes to 2026 taxes, giving them more time for deliberation.
As legislative sessions begin in January, this tax policy question represents one of the first major challenges states will face in adapting to the Trump administration’s economic policies.
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22 Comments
The Treasury is certainly applying pressure on states to conform to the federal tax cuts. But states may be reluctant to give up that revenue and control over their tax codes.
I imagine this will be a hotly debated issue in many state legislatures as they weigh the trade-offs involved.
This is an important issue for state lawmakers to grapple with as they balance federal incentives, their own fiscal needs, and political considerations.
Absolutely, the outcome could have significant implications for businesses and workers in each state, so it’s critical they get this right.
The Treasury is certainly applying pressure on states to conform to the federal tax cuts, but states may want to maintain their own tax policies and priorities.
Agreed, it will be interesting to see which states choose to align with the federal changes and which opt to go their own way.
The federal tax cuts present an interesting dilemma for states – align with the changes or maintain their own tax codes. I can see valid arguments on both sides of this issue.
Agreed, it will be important for state lawmakers to carefully weigh the pros and cons for their individual states.
This is an interesting development in the ongoing evolution of federal-state tax policy. It will be worth watching how each state navigates these complex political and fiscal considerations.
Agreed, the outcome could have significant implications for businesses and workers across the country depending on how it all shakes out.
Interesting to see the Treasury pushing states to align with the federal tax cuts. Curious to see how this plays out in each state’s legislative sessions – will they embrace the cuts or opt out?
It’s a complex issue with financial and political considerations for the states. I wonder if we’ll see a patchwork of approaches across the country.
The Treasury’s push for states to adopt the federal tax cuts highlights the inherent tensions between federal and state-level tax policy. It will be fascinating to see how this plays out.
Indeed, the potential for a patchwork of approaches across the states adds an interesting layer of complexity to this issue.
The federal tax cuts present an interesting dilemma for states – align with the changes or maintain their own tax codes. I can see valid arguments on both sides of this issue.
Absolutely, it will be important for state lawmakers to carefully weigh the pros and cons for their individual states.
The Treasury’s push for states to adopt the federal tax cuts highlights the inherent tensions between federal and state-level tax policy. It will be fascinating to see how this plays out.
I agree, the potential for a patchwork of approaches across the states adds an interesting layer of complexity to this issue.
The federal tax cuts present an interesting dilemma for states – align with the changes or maintain their own tax codes. I can see valid arguments on both sides of this issue.
It will be important to watch how state lawmakers navigate this, balancing the federal incentives with their own fiscal and political priorities.
It’s understandable that the Treasury wants more states to adopt the federal tax cuts, but states may be reluctant to give up that revenue and control over their tax codes.
Definitely a complex issue with a lot of moving parts. I’ll be curious to see how the political dynamics play out in state legislatures.