Even as many Americans are poised to see the benefits of the tax cuts written into President Donald Trump’s signature One Big Beautiful Bill, only a few states have fully adopted the most popular provisions into their own tax codes — and two, New York and Illinois, are actively blocking them.
Under the legislation, American workers will not pay federal income taxes on qualified tips, overtime pay, and car loan interest. Senior citizens will see an enhanced deduction of $6,000. But in a majority of states across the country, those changes will not automatically be rolled into the state tax code, meaning taxpayers may not see the full advantage intended by the provisions in the law.
According to a report published by the New York Post, only four states have fully adopted all of the new tax breaks: South Carolina, North Dakota, Montana, and Idaho. Governor Jared Polis (D-CO) said that because of the way state taxes work in his state, the majority of federal tax cuts would automatically apply to state tax filings.
“Claims that Colorado is refusing to adopt the majority of tax changes from H.R.1 [One Big Beautiful Bill] are not accurate,” a spokesperson for Polis told The Post. “All tax cuts in H.R. 1 are automatically incorporated into state tax code unless there is specific action to decouple.”
The reason Colorado’s state taxes align with the federal tax code is that they are based on federal taxable income — meaning the state only taxes the amount of income remaining after all federal tax breaks are applied. Other states that use the same process are South Carolina, Iowa, North Dakota, Idaho, Montana, and Oregon.
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The majority of states rely on Adjusted Gross Income (AGI), which does not reflect any federal tax cuts, and would have to take legislative steps to allow the cuts included in the recent legislation to trickle down to the state level.
“Some states start with federal taxable income, so most of the new deductions flow through automatically unless lawmakers opt out,” Adam Michel, director of tax policy studies at the Cato Institute, told the Post. “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.”
Arizona passed a law exempting taxes on tips already, and similar bills have been proposed in New Jersey and North Carolina.
Several solidly blue states have indicated that they won’t take those steps, claiming that doing so would quickly lead to budget shortfalls. California, for example, will not adopt the new tax breaks because officials believe the state would lose too much revenue to manage the current budget. In New York and Illinois, where static conformity laws would have caused the tax cuts to automatically transfer into the state tax code, the states are requiring an “add-back” for any deductions related to taxes on tips or overtime in order to protect revenue streams.
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