What's happened
U.S. states are varying in their adoption of new federal tax provisions, with some blue states like New York and Illinois declining to conform, risking billions in revenue. Meanwhile, others like Michigan are adopting certain benefits, highlighting a complex patchwork of compliance ahead of January 1.
What's behind the headline?
The divergence among states reflects deeper political and fiscal strategies. Blue states like New York and Illinois are deliberately choosing not to conform, risking significant revenue losses—up to $1.7 billion in New York—by not adopting provisions such as no tax on tips or overtime pay. This resistance may be driven by concerns over budget shortfalls and political ideology, as well as a desire to maintain control over state-specific tax policies.
Conversely, states like Michigan are embracing the federal benefits, which could provide relief to millions of seniors and workers. The patchwork approach creates a complex landscape where taxpayers' liabilities vary widely depending on their state of residence, complicating compliance and planning.
The broader implication is that federal tax reforms are not uniformly implemented, which could undermine the intended economic stimulus and social benefits. States that opt out may face revenue shortfalls, impacting public services, while those that conform could see increased administrative burdens but also potential economic gains.
This situation underscores the importance of state-level policy decisions in shaping the effectiveness of federal initiatives. As the new year begins, the varying levels of conformity will likely influence political debates and fiscal stability across the country, with the potential for legal challenges and further legislative adjustments.
What the papers say
The NY Post reports that blue states like New York and Illinois are declining to adopt the new federal tax provisions, citing potential billions in shortfalls, and accuse them of 'deliberately blocking' benefits such as no tax on tips and overtime. Tax experts, including Adam Michel from the Cato Institute, clarify that states like Colorado are technically conforming due to their 'scrolling conformity' to the federal code, but many others are not. Meanwhile, Business Insider UK highlights that the federal tax changes aim to provide relief for 74 million Americans, especially seniors, with some states already adopting these benefits, like Michigan. The contrast between states' responses illustrates a complex landscape of tax policy adaptation, with implications for revenue and social welfare.
How we got here
The federal tax code changes, including provisions from the One Big Beautiful Bill Act, aim to provide tax relief for workers and seniors. States automatically conform if they align their tax codes with the federal system, but many, especially those starting with adjusted gross income, must pass legislation to adopt these changes. The debate centers on revenue impacts and policy priorities, with some states resisting or selectively adopting provisions.
Go deeper
More on these topics