Treasury Secretary Scott Bessent probably confused a lot of taxpayers yesterday with a misleading statement accusing policymakers in Colorado, Illinois, New York, and the District of Columbia of somehow depriving their residents of federal tax cuts enacted in the recent Trump tax bill.
Fox News announced Bessent’s statement this way: “Bessent blasts Democrat-led states for blocking Trump tax relief in OBBBA.”
That’s incorrect. Whether they are good policy or not, these federal tax cuts will be available to residents of every state and D.C., regardless of what their state policymakers do.
To be sure, there’s ample reasons that state and local elected officials might want to take a stand against the Trump tax bill. It will massively increase the federal deficit while delivering $1 trillion in tax cuts to the wealthiest 1 percent over the coming decade. And it’s unpopular.
But even if they hate the bill, state policymakers are not taking away federal tax breaks from their constituents.
So what is Secretary Bessent possibly talking about?
His statement seems to have been sparked by relatively run-of-the-mill actions taken by legislatures and governors in about a dozen states so far to update their state tax codes’ references to federal tax law. Every state with an income tax bases the definition of income to at least some degree on the federal Internal Revenue Code – an action known as “conformity” – and routinely or automatically updates state tax law to address changes to the Code.
Conformity carries with it no requirement and no expectation that states must lose state tax revenue every time the federal government changes the Internal Revenue Code. In fact, states have built in multiple safeguards that give them control of their own tax codes. Such safeguards are essential. States, unlike the federal government, must balance their budgets every year, so every dollar lost to conformity comes at the expense of funding for schools, roads, health care, and other state services. While the Trump Administration and Congressional Republicans’ tax and spending bill will add $3 billion to $4 billion to the national debt over the next ten years, states cannot afford to follow suit, especially since that same bill is cutting federal aid to states.
Most states conform to the federal definition of Adjusted Gross Income (AGI) and use that as the starting point for state tax calculations. AGI is unaffected by many of the high-profile cuts for individual taxpayers enacted in the so-called “One Big Beautiful Bill Act,” such as exemptions for some tipped income and overtime pay; under OBBBA, taxpayers calculate their AGI, and then subtract those exemptions. If a state conforms to AGI, then the only way to exempt tips and overtime from state income tax is by passing separate legislation to do so. By structuring the tax cuts for tipped income and overtime in such a way as to leave AGI unaffected, Congress created a default assumption that most states would not incorporate these tax breaks into their own tax codes.
Another way states maintain control over their own state tax codes is that they typically make a practice of choosing not to conform to specific provisions of federal tax law. They may do so because they disagree with the policy, because they cannot afford the loss of revenue, or because what makes sense as federal policy doesn’t make sense as a state policy.
For example, a majority of states – including both red states and blue states – have chosen not to conform to federal “bonus depreciation” rules that allow businesses to immediately deduct the cost of certain capital investments. This illustrates another key point about conformity: What’s arguably in the interest of the federal government may not be in the interest of states.
When a state conforms to a federal investment tax break, such as bonus depreciation, or the new “expensing” provisions that were part of the federal tax bill, it encourages investment in other states – potentially undermining its own economic development interests. This is a straightforward implication of how states apportion their corporate income taxes, as we explained in this earlier post.
There is a reasonable debate to be had – and states are reasonably considering their options – as to whether various provisions of the federal tax bill should be incorporated into state tax codes. Our analysis shows that conforming to many of the federal changes would hurt state economies and budgets, but in a few cases conformity would be helpful. For example, states should conform to the provision of OBBBA known as “NCTI” that responds to multinational corporations’ tax avoidance mechanisms by taxing some of their overseas profits.
But ultimately that’s a decision for each state to make, not the federal government. It’s wildly inappropriate for a U.S. Treasury Secretary to lean on states to adopt or not adopt specific provisions in their own state tax codes, especially when his own department is making it harder for states to know how costly they will be. It’s even more appalling for a Treasury Secretary to deliberately mislead taxpayers.
