Big Beautiful Bill: State implications
As the US House works out its “One, Big, Beautiful Bill”, statehouse legislators are closely watching, due to the impact both of its tax and spending provisions. At least one of the newly proposed deductions, for car loan interest, would flow through to most state’s
tax. A tax is a mandatory payment collected by local, national, and state governments from individuals and businesses to cover costs of government services, goods, or activities.
systems absent a decoupling from federal law, and some states could see multiple new tax provisions hit their income tax bases.Meanwhile, proposed changes in cost sharing for Supplemental Nutrition Assistance Program (SNAP) benefits would increase states’ obligations, and certain states could experience a reduced federal match rate for Medicaid expansion. Similarly, proposed changes to Medicaid eligibility and work requirements will reduce enrollment. This will, by default, result in substantial savings for states who share these costs with federal government. If, however, some states chose to expand their own social safety nets to provide benefits to those excluded from federal coverage, costs would run sharply in the other direction.
The tax changes could have an immediate effect, as they apply to the current (2025) tax year. The changes to benefit cost-sharing would take effect in the federal fiscal year of 2028. Select provisions of note for state lawmakers include:
Making the current higher
- standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. The 2017 Tax Cuts and Jobs Act, also known as the TCJA, nearly doubled it for all taxpayers.
permanent and temporarily increasing it by $1,000 (single) / $2,000 (joint)Providing a deduction for car loan interest - Exempting qualified tips from income taxation
- Exempting premium pay overtime from income taxation
- Increasing the Section 179 expensing cap from $1 million to $2.5 million
- Temporarily extending
- full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It eliminates a bias within the tax code, and encourages businesses to invest more. This, in turn, increases worker productivity, increases wages, and creates new jobs.
under Section 168(k)Increasing the state share of SNAP benefits and administrative costs, with “quality control” provisions that reduce federal payments in states with high error rates - Imposing Medicaid work requirements, adjusting Federal Medical Assistance Percentage (FMAP) rates for states which adopt future Medicaid expansion, restricting future use of provider taxes, and reducing the expansion FMAP for states which enroll undocumented immigrants with own-source revenues
- Many additional provisions will be of great interest to states’ residents, of course, but their effects on state budgets are less direct. Raising the SALT cap would have a limited impact on state budgets, though some states cap
property taxes. Property taxes are primarily levied against immovable property, such as land and buildings. They can also be levied against tangible personal property, like vehicles and equipment. Property taxes are a major source of revenue for state and local governments in the U.S. They help fund schools, roads and police services, among other things.
deductions from their state income tax in accordance with federal cap. But this bill could also have a fiscal impact in other ways. Other federal spending cuts may also have an impact, eliminating programs that states also contribute to (resulting in savings), or causing states to fill in the void by increasing expenditures. Both supporters and opponents of the provisions differ on how they will affect the economy in general, which is important for state tax collection. The indirect effects are also significant, but outside the scope of this study.The table below provides estimates of the costs of the tax provisions above if they were incorporated into state income tax codes. The figures in
bold would be automatically incorporated whenever a state conforms to its latest version of Internal Revenue Code, which 22 states do continuously. The figures that are not bolded represent estimated revenue losses if states made special legislative provisions to match these federal policies. They would not be incorporated automatically–even if lawmakers update their static (fixed-date) IRC conformity date to match a version of federal law inclusive of these new provisions.We estimate that, if all states had conformity dates matching the proposed new law, these tax changes would reduce state income tax revenues by $3.3 billion in aggregate in tax year 2026, representing a 0.7 percent reduction in state-level
individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. has a progressive income-tax system where rates increase as income increases. The Federal Income Tax was created in 1913, with the ratification 16th Amendment. Individual income taxes, which are only 100 years old but are the biggest source of tax revenue for the United States, have been around since 1913.
collections. If all states voluntarily adopted each of these provisions, we estimate a revenue reduction of $20.5 billion, or 4.2 percent, in the state’s income tax collections. If all states willingly incorporated each of these provisions, we estimate an annual revenue reduction of $20.5 billion, or 4.2 percent of states’ income tax collections.These estimates involve a variety of simplifying assumptions, spelled out in a concluding set of methodological notes. These estimates are meant to give a general idea of the costs of these provisions, but they do not provide the same accuracy as state revenue departments’ estimates based on proprietary state data. They also do not involve the fine tuning that is required for each state. State Income Tax Costs of Incorporating the “One, Big, Beautiful Bill” Tax Provisions ($ Millions)
Notes: Provisions which would be incorporated with up-to-date IRC conformity are in bold. Provisions that require separate legislative approval are not bolded. See methodology for assumptions and methods.
Sources: US Bureau of Labor Statistics; Internal Revenue Service; US Department of Agriculture; US Census Bureau; New York Federal Reserve Bank; Edmunds; Tax Foundation calculations.
Increased Standard Deduction
Under the House Republican tax plan, the higher standard deduction levels established under the Tax Cuts and Jobs Act (TCJA) are made permanent, with a temporary boost of an additional $1,000 for single filers ($2,000 for joint filers) for tax years 2025-2028. Eight states (Arizona Colorado Idaho Missouri New Mexico North Dakota South Carolina and Utah) as well as the District of Columbia are in line to temporarily boost their standard deductions, at a cost of $636.5 millions in 2026. This does not include costs associated with making the current standard deductible permanent compared to reverting back to a lower standard.
Three states (Arizona Idaho and South Carolina) are fixed-date conformity states, and would not be able incorporate the higher standard until they updated their conformity dates by legislation. Utah offers a
tax creditsA tax credit is an option that reduces the final tax bill of a taxpayer dollar-for-dollar. Tax credits are different from deductions and exclusions, which reduce the taxpayer’s final tax bill.
The federal budget legislation also creates a temporary additional $4,000 bonus for senior citizens, which would cost states about $7.6 billion per year in aggregate if they all adopted similar plans. However, no state is currently on the line to incorporate this provision. The federal budget legislation also creates a temporary additional $4,000 bonus for senior citizens, which would cost states about $7.6 billion per year in aggregate if they all adopted similar plans, but no state is currently in line to incorporate the provision.
No Tax on Car Loan InterestUnder the budget bill, personal passenger vehicle loan interest is deductible up to $10,000 per year, with a phaseout for high earners beginning at $100,000 in income ($200,000 for joint filers). This provision reduces gross Income. For individuals, gross pay is the total of all pre-tax earnings, including wages, tips, investment income, interest and other sources of income. For businesses, gross profit is total revenue less cost of goods sold.
would then flow through to all the states that are compliant with a current version IRC. Only Arkansas, Mississippi New Jersey and Pennsylvania have income taxes that are calculated separately from the IRC base. However, many states still adhere to fixed-date conformity, some of which are several years old, so they would not be able to take advantage of this deduction unless they updated. If all states with IRC conformity provided this deduction, it would reduce aggregate state tax collections by $2.2 billion in 2026.
No Tax on TipsConsistent with one of President Trump’s campaign pledges, the House tax plan exempts qualified tips from income taxation for tax years 2025-2028, structured as a deduction available to itemizers and non-itemizers alike. To limit tax avoidance and to exclude highly compensated employees, a qualified tips is defined as cash tips received by an individual in a profession “which traditionally received tips before December 31, 2024”. Taxable income is the amount that is subject to tax after deductions and exclusions. Taxable income is different from gross income for both individuals and corporations.
instead of adjusted gross income – Colorado, North Dakota, South Carolina (subject to an update on conformity dates) – would automatically incorporate this exemption. The policy has been implemented in many states despite being poorly targeted. Only 4 percent of workers in the lower half of hourly wage are in tipped occupations. Our estimates show that North Dakota would experience no revenue loss even though it is in line to implement the provision. This is because the blended state rate of 1.95 percent only kicks in when the state’s taxable income exceeds the federal standard deduction of $15,000, which is currently $48,475 for North Dakota. This provision, like the tip deduction, would only be automatically applied to the three states who use federal taxable earnings as their starting point. In South Carolina, the provision will only be applicable when the state updates their fixed conformity date. The cost of excluding the premium portion of overtime in these three states could be $450 million by 2026. If all income taxing state adopted a similar exclusion, the cost would be over $11 billion annually. The actual cost could be even higher, because the preferential treatment of overtime would create incentives to shift more work to premium overtime rather than hiring additional workers, and might also lead workers to find creative ways to characterize more of their income as qualifying overtime pay.
Other Tax Provisions
Raising the Section 179 small business expensing cap to $2.5 million is a pro-investment policy with a relatively light revenue impact on states conforming to the provision. The states that conform to the pro-growth provision of Section 168(k), will suffer modest revenue losses. However, this is only because it restores and temporarily extends corporate full expensing. A higher estate tax exclusionA tax exemption excludes income, revenue or even taxpayers entirely from tax. The Internal Revenue Service (IRS) grants tax-exempt status to nonprofits that meet certain requirements. This allows them to avoid paying income tax.
only affects Connecticut, as it is the last state to use federal exemptions in its own
estate taxes. An estate tax is levied on the net value, after exclusions and credits, of an individual’s estate at the time of their death. The estate pays the tax before assets are distributed.
calculations.
SNAP Cost Sharing
Under the budget bill, states assume responsibility for a greater share of SNAP expenditures as of FY 2028, which proponents see as incentivizing better program administration, but which also shifts more costs down to states. Administrative costs are distributed equally between the federal and state governments and vary widely from one state to another. According to the proposal, the states’ share of the administrative costs will rise to 75 percent. This represents a shift of $2.8 billion based on the most recent data available (not grossed up to FY 2020). In addition, the states would be responsible for a portion of food benefits, which is a first. In FY 2023, 28 of the states had error rates in double digits, which would have been enough to trigger a cost share of 25 percent. Using the most recent enrollment and benefit costs data, a state’s greater responsibility for payments would amount to $19.8 billion. This would result in an additional $22.7 billion for SNAP. If successful, other federal changes will provide cost savings that could reduce this amount. If states reduce the rate of errors in payments to respond to the quality-control incentive, this will also result in lower costs. If all states secured the lowest possible share, their responsibility for benefits payments would drop to $4.6 billion, less any direct savings from a lower error rate.Medicaid Reductions for States Covering Undocumented ImmigrantsUndocumented immigrants are ineligible for any federal Medicaid benefits, but certain states choose to provide medical coverage for undocumented immigrants using own-source revenues. The federal budget is not affected by these state expenditures, but the proposed legislation imposes a fine on states that provide such benefits. The proposal would reduce the FMAP for ACA expansion enrollees in these states from 90 percent to 80 percent beginning FY 2028. This provision would reduce funding to California, Colorado, Connecticut Maine, Massachusetts Minnesota, New Jersey New York, Oregon Rhode Island Vermont and Washington unless such programs were rescinded. Medicaid expansion in Illinois, Utah and New Jersey would be automatically terminated if state laws withdraw from the program due to a decline in federal match. We estimate that the reduced match would cost these states an aggregate $9.4 billion in FY 2028 if they continued to provide Medicaid-like programming for undocumented immigrants.The House budget contains other significant Medicaid changes as well. The provider taxes that states have used to increase Medicaid match in the past will be more difficult to expand. The bill also imposes work requirements, which are likely to result in a significant reduction in Medicaid eligibility. States are responsible for a large share of Medicaid costs, so any reduction in eligibility will result in dramatic savings for the state. If, however, states sought to offset these reductions with their own resources, the additional cost to state coffers would be substantial.Table 2. Additional State SNAP and Medicaid Expenditures Beginning FY 2028 ($ Millions)
Notes: Changes to both SNAP and Medicaid begin FY 2028. Medicaid costs are for FY 2028, adjusting current data by CMMS forecasts. Medicaid costs are for FY 2028, adjusting current data by CMMS forecasts.
Sources: US Department of Agriculture; Centers for Medicare & Medicaid Services; Tax Foundation calculations.
Concluding Notes
Among tax provisions, only the car loan interest deduction broadly flows through to states, and lawmakers may wish to decouple from this provision, which offers scant economic benefit. In the three states that base their income tax calculations on federal taxable income, there are additional modifications to be considered. The “One, Big, Beautiful Bill”‘s tax provisions will have a minimal impact on most states, but the reduction in SNAP benefits is of greater concern. State tax collections have increased by 50 percent since the 1990s and 19.4 percent since 2017. Most states should be able absorb the direct effects of the budget bill without much difficulty. Indirect effects, such as Medicaid reductions, which some states may choose to offset in their own budgets are much larger. Additionally, broader economic considerations, particularly any possible
tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers which increase prices, reduce the amount of goods and services available to US businesses and consumers and place an economic burden on foreign suppliers.
-induced economic downturn, loom as a potential threat to states’ fiscal health.
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Methodology
Increased Standard Deduction: Total estimated US reduction in federal taxable income is allocated to states based on their 2023 share of standard deduction claims, adjusted by variance in the value of the standard deduction per claimant, using IRS Statistics of Income data. Estimate does not account for state phaseout provisions (e.g., Colorado). The estimated reduction in federal taxable income for the US is distributed to the states based on the share of full-service restaurant workers’ compensation across all states. This data comes from the BLS Quarterly Census of Employment and Wages. Income tax revenue losses for each state are calculated using a blended marginal rate based on $20,000 – $40,000. Income tax revenue losses are computed against a blended rate for each state based on $60,000-$80,000 in taxable income. Income tax revenue loss is calculated by a blended marginal rate across $60,000-$80,000 in taxable earnings. The total reduction is based on the phaseout, but there is no adjustment for differences in the proportion of taxpayers affected by the phaseout. The Quality Control Incentive also assigns a share of the total food benefits payments to states (using FY 2024 data). This cost sharing is based on the state payment error rate. For these calculations, states are assigned the error rate in the latest available (FY 2023) USDA data.Medicaid FMAP Reduction for Coverage of Undocumented Immigrants:
June 2024 Medicaid data for VIII Group enrollees are adjusted by current baseline projections to yield FY 2028 estimates, from which an additional state share is calculated.
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