Some States Do Not Use New Federal Tax Breaks

New tax breaks from the federal government are not being used by all states. This means people might get savings on their federal taxes but not on their state taxes. There are also disagreements among Republicans about tax rules.
By Newsroom | Taxes, Politics |

A Slow Rollout for Federal Tax Benefits

The U.S. Treasury has encouraged states to adopt federal tax breaks, part of a larger tax package signed earlier this year. However, the adoption process has been uneven, with only a handful of states formally agreeing to mirror these federal changes. This divergence means that while millions of Americans may see benefits on their federal tax returns, the actual savings may not be reflected in their state tax obligations. The situation has highlighted how state tax systems, which operate independently from federal rules, can lead to a patchwork of tax treatments across the country, even for the same federal provisions.

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Federal Tax Package: A Divided Reception

A significant federal tax package, enacted on July 4th, introduced new deductions and tax breaks. The U.S. Treasury has actively promoted these changes, urging states to align their tax laws accordingly. The intention appears to be a broad application of these federal benefits. However, the reality on the ground is far more complex.

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  • Varied State Tax Structures: State income tax laws are not uniform. Some states automatically adjust to federal changes, a concept known as "rolling conformity." In these states, like Iowa, Montana, North Dakota, and Oregon, federal tax breaks would generally translate to state-level savings without specific state legislative action.

  • Opt-In Requirements: Conversely, many states have tax codes that are written in a way that requires their legislatures to actively pass legislation to adopt these federal tax breaks. Without this affirmative step, the federal changes will not appear on state tax forms.

  • Limited State Adoption: As of recent reports, only a few states have taken votes on whether to adopt these federal tax breaks. This limited adoption has led to a situation where residents in many states will not see the same savings on their state tax returns as they do on their federal filings.

Evidence of State Hesitation

Reports indicate a clear division in how states are handling the new federal tax provisions:

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  • Federal Push vs. State Reality: The U.S. Treasury's push for adoption contrasts with the actions of many states. While the Treasury desires wider embrace, "only a few have done so," according to reporting from AOL.

  • Colorado's Rejection: Colorado, for instance, has explicitly rejected a provision related to taxes on overtime. This means residents will benefit federally but not at the state level, as detailed by Newsweek.

  • Legislative Decision Points: Fortune notes that in states where tax laws differ, legislatures must "opt in" for the breaks to apply. This opt-in process has been slow, with only a few states moving to vote on the matter.

  • De-coupling from Federal Provisions: Thomson Reuters highlights this trend, stating that "State legislatures are split on OBBBA’s tax breaks." This divergence demonstrates that "federal changes no longer guarantee uniform state treatment."

Republican Discontent Over SALT Cap

The debate over adopting federal tax cuts is further complicated by internal Republican disagreements, particularly concerning the State and Local Tax (SALT) deduction cap.

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  • SALT Cap as a Hurdle: A bloc of five House Republicans from high-tax states have signaled their intention to oppose broader tax packages unless the SALT cap is significantly raised. CNBC reports that these lawmakers are prepared to "derail Trump's tax cuts" over this issue.

  • Presidential Promises: According to Representatives Mike Lawler and Nicholas LaLota, President-elect Trump has promised to support efforts to increase the SALT deduction, reportedly asking for a specific number that would secure their votes for his tax agenda.

  • Internal Opposition: Despite this, the push for a SALT cap increase faces opposition from "hundreds of their fellow Republicans," indicating a deep rift within the party on tax policy. Representative Lawler has stated, "As it currently stands, I was a no" on tax bills that do not address SALT, as reported by NPR.

Broader Republican Divisions on Tax Policy

Beyond the SALT cap, there are indications of broader Republican hesitance and strategic division regarding the pace and scope of the federal tax agenda.

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  • "Stuck in the Mud": NBC Washington describes the situation as Trump's tax cuts being "stuck in the mud," partly due to splits over spending priorities.

  • Senate's Focus Elsewhere: Some Senators, like Lindsey Graham, have indicated a preference for moving forward with other legislative priorities, such as border security, before addressing tax cuts. This suggests a potential lack of unified momentum.

  • Limited Timeframe: Lawmakers are reportedly discussing extending tax cuts for only a few years, implying a cautious approach or a recognition of potential political challenges ahead, as noted by NBC Washington.

Analysis of State Responses

The varied state responses to federal tax changes reveal a fundamental aspect of modern tax policy: the increasing independence of state fiscal decisions.

  • Federalism in Practice: The situation illustrates a practical application of federalism, where states retain significant autonomy in structuring their tax systems. The Treasury's encouragement, while influential, does not override state legislative prerogatives.

  • Fiscal Considerations for States: States may opt against adopting federal tax breaks for various reasons, including:

  • Budgetary Impacts: Adopting federal deductions could reduce state tax revenue.

  • Existing State Priorities: State legislatures might have different fiscal goals or tax priorities.

  • Complexity of Tax Codes: Integrating federal changes into unique state tax structures can be administratively complex.

  • Transparency and Taxpayer Understanding: The divergence between federal and state tax treatments necessitates clear communication to taxpayers, who may not fully understand why their state tax liability differs from their federal one, as highlighted by Thomson Reuters.

Conclusion and Implications

The reluctance of many states to automatically adopt federal tax changes, coupled with internal Republican divisions over issues like the SALT cap, presents significant challenges to the uniform implementation of the new federal tax package.

  • Fragmented Tax Landscape: The current trajectory suggests a continued fragmentation of the tax landscape, where federal tax policy does not automatically translate into uniform state-level benefits or burdens.

  • Political Negotiation: The success of broader tax initiatives may hinge on the ability to bridge internal party divides, particularly the contentious SALT cap issue.

  • Taxpayer Impact: Residents in states that do not adopt the federal breaks will experience differing tax outcomes depending on their location, requiring careful navigation of both federal and state tax laws.

  • Future Policy Direction: This situation prompts questions about the future of federal-state tax coordination and whether future federal tax legislation will account for the varied fiscal architectures of individual states.

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Frequently Asked Questions

Q: Why are some states not using the new federal tax breaks?
Some states need their lawmakers to vote to accept these breaks. Others have different tax rules already.
Q: What is the SALT cap issue?
Some Republicans want to raise the limit on how much state and local tax people can deduct. Others do not agree.
Q: Who is affected by this?
People in states that do not adopt the federal breaks will not get the same savings on their state taxes as they do on their federal taxes.
Q: What does this mean for the future?
It shows that states have different tax rules and federal tax changes do not always apply the same way everywhere.