State income taxes affected by final federal reconciliation bill

The effects of the law will depend, in the immediate term, on how the states currently conform to federal tax law.

Final federal reconciliation legislation enacted on July 4, 2025, modifies the Internal Revenue Code in ways that could affect business-related income taxes imposed by state and local governments. Most state income tax systems use federal taxable income (corporate) or adjusted gross income (individual) as a starting point for state income tax computations, so changes to the federal income determinations can affect state taxes. By contrast, states do not automatically conform to federal tax rate changes, and most do not adopt minimum tax regimes that exist outside of the general taxes imposed under IRC Sections 11 and 1 (for corporations and individuals, respectively).

The law's state income tax implications largely depend on how each state generally conforms to the IRC and specifically conforms to affected provisions. States conform to the IRC in various ways. Most either automatically incorporate the federal tax law as it changes (known as "rolling" conformity) or adopt the federal tax law as of a specific date (known as "fixed" conformity). Several "selective" conformity states adopt a hybrid of rolling and fixed conformity.

Because states adopt differing policies that modify federal income and deductions, taxpayers must consider each state's specific conformity to IRC provisions in addition to its general adoption of the IRC.

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