States decouple from specific federal tax policies
States conform to the Internal Revenue Code in various ways. Most 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). Notwithstanding that general manner of conformity, states may decouple from specific federal tax provisions.
One impetus for decoupling is state balanced-budget requirements. When conformity to federal tax law is projected to decrease revenue, state lawmakers often consider decoupling among potential solutions to balance a budget. Owing to these requirements, approximately two-thirds of states have historically decoupled from federal bonus depreciation. Thus, the OBBBA changes allowing permanent 100% bonus depreciation for qualified property and qualified improvement property does not affect most states. States, such as Illinois, have similarly proposed or enacted decoupling from new Section 168(n), which allows elective immediate expensing of qualified production property.
The OBBBA made changes to other business expensing provisions, including the Section 163(j) limitation on business interest expense and the treatment of domestic research and experimentation (R&E) costs. Together with expanded bonus depreciation, conformity to these provisions would accelerate business deductions and reduce near-term state tax revenue. In response, states like Michigan and Pennsylvania are not adopting the OBBBA’s modifications to the interest expense limitation or domestic R&E expensing.
Reconsidering automatic conformity
States rarely change their method of conformity. After the Tax Cuts and Jobs Act (TCJA), two states enacted laws changing their general adoption of the Internal Revenue Code. Iowa changed from fixed to rolling conformity in 2019, while Virginia adopted a rolling conformity method (later repealed) in 2023.
In 2025, however, some states began proposing a shift to fixed conformity. In fiscal notes to such proposed legislation, some lawmakers cited expectations for retroactive federal tax changes under legislation that would become the OBBBA. Fixed conformity affords lawmakers the opportunity to study and selectively conform to budget impacts of changes to federal income tax laws.
Other states have proposed making their rolling conformity statute contingent on state revenue impacts. These proposals are akin to Maryland law, which adopts rolling conformity but automatically decouples from federal income changes having at least a $5 million revenue impact for the current or any preceding fiscal year.
Finally, some lawmakers in states with rolling conformity are considering delayed conformity to specific OBBBA provisions. A 2026 Massachusetts proposal, for example, would delay conformity to various business expensing rules for one to two years.
State tax authority guidance and administrative policy
State tax authority guidance on OBBBA takes many forms. States regularly issue written notices upon enactment of significant federal and state tax legislation, but guidance can be found in informal communications. For example, the Virginia Department of Taxation posted a video update for tax professionals referencing state conformity expectations for the 2025 filing season.
Updates to state tax form instructions and regulations can also shape OBBBA conformity policies. This may be particularly impactful in determining state policy on Section 951A inclusions, which are applicable to multinationals. After the TCJA, many states took administrative positions that treat these inclusions as a foreign dividend for state purposes. However, the rules and instructions espousing that policy often refer to global intangible low-taxed income (GILTI), which is replaced by net controlled foreign corporation tested income (NCTI) under the OBBBA. References to GILTI are thus being revised to NCTI, as is the case in Oklahoma regulation amendments proposed in November of 2025.
In the midst of this OBBBA response, state governments are addressing impacts of other US policies, including the end of penny production. The US Mint struck the final penny in November 2025, leading retailers to adopt rounding policies for cash transactions in the event of a penny shortage. Rounding, in turn, solicited state and local administrative guidance concerning the collection of sales tax on affected retail transactions.
Following significant changes in US trade policy, states and government cooperatives, such as the Streamlined Sales Tax Governing Board, have advised on the impact of tariffs on the sales and use tax base. These state tax policies may be further implicated by the 2026 US Supreme Court decision on International Emergency Economic Powers Act tariffs.
Finally, the United States Postal Service adopted a final rule modifying its Domestic Mail Manual. The new language in the rule clarifies that a postmark does not signal the date service accepted possession of the mail but instead reflects the date of processing. Postmarking affects state tax administration, as the timeliness of tax filings, payments and other correspondence are often predicated on postmark dates.
