TAX POLICY ANALYSIS  |  MARCH 2026

How diverging state tax laws are creating compliance complexity for businesses and individuals across America

EXECUTIVE SUMMARY

Enacted on July 4, 2025, the One Big Beautiful Bill Act (OBBBA) introduced sweeping changes to the federal tax code. However, federal law is only the starting point. Most states base their income tax systems on the Internal Revenue Code (IRC), meaning federal changes either flow through automatically or must be affirmatively decoupled.

As of March 2026, state responses range from broad conformity to targeted or comprehensive decoupling. The result is a fragmented national tax landscape that presents significant compliance, planning, and financial reporting challenges for multistate taxpayers.

Background: What Is IRC Conformity?

Most states do not build income tax systems from scratch. Instead, they use the IRC as a baseline and apply state-specific modifications through additions, subtractions, and credits. This framework, known as IRC conformity, simplifies administration for both taxpayers and tax authorities.

When federal law changes, states must decide whether to:

• Conform automatically
• Update conformity through legislation
• Selectively adopt or reject provisions

These decisions directly affect state tax bases, revenue collections, and taxpayer compliance obligations.

The Four Types of State Conformity

States generally fall into four categories based on how they incorporate the IRC:

Type	Description	Example States
Rolling Conformity	Automatically adopts federal changes unless the state affirmatively decouples	Colorado, Iowa, Kansas, Michigan, New York, Oregon, Pennsylvania
Static (Current) Conformity	Conforms to the IRC as of a fixed date that is periodically updated	Arizona, Georgia, Hawaii, Idaho, Kentucky, South Carolina, Virginia
Static (Lagged) Conformity	Conforms to an older IRC version, often significantly behind current law	California, Florida, Indiana, Maine, Minnesota, Wisconsin
Selective Conformity	Adopts specific IRC provisions on a case-by-case basis	Arkansas, Mississippi, New Jersey

Several states have recently modified their conformity posture in response to OBBBA and should not be viewed as static examples. For instance, Virginia updated its IRC conformity date to December 31, 2025 while addressing specific OBBBA provisions through targeted adjustments. California, although technically a static conformity state, continues to operate a highly selective system that excludes many federal provisions by policy as well as timing.

The OBBBA Provisions Driving State Decisions

Not all OBBBA provisions carry equal weight for state governments. The most significant legislative activity has centered on provisions with large revenue implications.

Business Expensing Provisions

Section 168(k) – Bonus Depreciation

OBBBA permanently restored 100% bonus depreciation for qualifying property. Many states had already decoupled from bonus depreciation and are therefore unaffected, while others must decide whether to adopt or reject the restored full expensing.

Section 168(n) – Qualified Production Property

A newly created provision allowing 100% expensing for certain domestic production facilities. Because it is a new code section, existing state decoupling statutes do not always automatically apply, making it a focal point of state legislative action.

Section 174A – Domestic R&E Expensing

OBBBA allows immediate expensing of domestic research and experimental expenditures while maintaining 15-year amortization for foreign R&E. This divergence raises both revenue concerns and potential constitutional considerations under the dormant Commerce Clause.

State Treatment of Domestic R&E (Section 174A)

States have taken divergent approaches to domestic R&E expensing:

State	Action	Treatment
Michigan	Decoupled	Must amortize; ignores §174A
Pennsylvania	Decoupled	Must amortize under pre-OBBBA rules
New York	Proposed	Retroactive decoupling under consideration
Rhode Island	Decoupled (2025)	Broad decoupling for 2025 tax year
Maryland	Temporary (2025)	Must amortize; subject to future legislation
California	Static conformity	Must amortize due to pre-OBBBA conformity date
D.C.	Emergency decoupling	Must amortize; subject to federal intervention

Practical Impact: The “Add-Back” Problem

For taxpayers operating in decoupling states, the primary compliance issue is the required adjustment between federal and state taxable income.

Example: $1,000,000 Domestic R&E Expenditure

Item	Federal	State (Decoupled)
Deduction	($1,000,000)	($100,000)
Add-back	–	+$900,000

Result: State taxable income is $900,000 higher than federal taxable income.

Financial Reporting Implications (ASC 740)

This mismatch creates deferred tax assets (DTAs), as taxpayers pay higher state tax in the current year but recover deductions over time. Multistate taxpayers must now track different tax bases across jurisdictions, increasing accounting complexity.

Section 163(j): Interest Deduction Limitation

OBBBA restored the EBITDA-based limitation for business interest expense deductions. Several states have responded by reverting to the pre-OBBBA EBIT-based calculation as of December 31, 2024, effectively decoupling from this provision to preserve revenue.

Personal Tax Provisions

OBBBA introduced new individual deductions for:

• Tips
• Overtime income
• Auto loan interest

It also increased the standard deduction and expanded AMT thresholds.

These provisions generally flow through automatically in rolling conformity states but are excluded in static conformity states unless legislative updates occur.

International Tax Provisions

OBBBA replaced the GILTI regime with Net CFC-Tested Income (NCTI). States vary widely in their treatment:

• Some adopt the new framework
• Others retain GILTI
• Some do not conform at all

This divergence further complicates multistate corporate tax planning.

State-by-State Legislative Snapshot

State	Conformity	Key Action
Rhode Island	Rolling	Decoupled from OBBBA for 2025 tax year
California	Static	Conformity date excludes OBBBA
Michigan	Static	Broad decoupling from §§168(k), 168(n), 174A
Pennsylvania	Rolling	Targeted decoupling, including §163(j)
Delaware	Rolling	Decoupled from key expensing provisions
Illinois	Rolling	Modified §168(n) and international provisions
Maryland	Rolling	Temporary decoupling for 2025
Colorado	Rolling	Selective decoupling
New York	Rolling	Proposed retroactive decoupling
Maine	Static	Pre-OBBBA conformity; no automatic adoption
Tennessee	No PIT	Decouples for excise tax purposes
D.C.	Rolling	Emergency decoupling; federal override uncertainty

Sources: Tax Notes, “State Responses to Conformity Issues Under OBBBA” (Jan. 5, 2026); RSM Q4 2025 State Corporate Tax; Thomson Reuters Tax; Crowe; Accounting Today (March 2026)

Political and Fiscal Dynamics

A general pattern has emerged in which many Republican-led states are more likely to adopt OBBBA provisions, while many Democratic-led states are more likely to decouple, particularly from provisions with significant revenue impact.

The primary driver is fiscal: full conformity with OBBBA’s business provisions would reduce state tax revenues. Policymakers must weigh revenue preservation against the administrative simplicity and economic incentives associated with conformity.

Compliance Implications

As of March 2026, many state positions remain unsettled. Key challenges include:

• Return preparation complexity due to differing state rules
• Estimated tax exposure from incorrect conformity assumptions
• Financial reporting burdens from multi-state differences
• Software limitations in implementing state-specific adjustments

Practitioners are broadly advising extensions where feasible to allow time for legislative clarity.

Constitutional Considerations

The differing treatment of domestic and foreign R&E under §174A raises potential dormant Commerce Clause concerns under Kraft General Foods v. Iowa. While analysts have identified possible risks, no court has yet ruled on the issue, and the exposure remains theoretical.

The District of Columbia: A Unique Case

D.C. enacted emergency legislation to decouple from OBBBA provisions. However, Congress has moved to block portions of that decoupling, creating ongoing legal and procedural uncertainty. This reflects D.C.’s unique status, where federal oversight directly affects local tax policy.

What States Have Broadly Conformed

Some states, particularly those with rolling conformity, have taken no action and therefore automatically adopt OBBBA provisions. However, even in these states, conformity may be temporary, as legislatures often enact retroactive decoupling measures.

States with static conformity dates set prior to July 2025 effectively exclude OBBBA without additional legislation.

Looking Ahead

The state conformity landscape remains in flux. Additional legislative activity is expected throughout 2026, and taxpayers should anticipate:

• Retroactive law changes
• Amended return requirements
• Continued divergence across jurisdictions

The longstanding assumption that federal and state tax systems operate in parallel is no longer reliable. Multistate taxpayers must now approach compliance with a jurisdiction-by-jurisdiction framework.

Conclusion

OBBBA has fundamentally altered the relationship between federal and state tax systems. The resulting patchwork of conformity and decoupling creates both risk and opportunity, requiring careful planning, detailed modeling, and continuous monitoring of legislative developments.

For practitioners and taxpayers alike, the key takeaway is clear: state tax conformity can no longer be treated as a secondary consideration. It is now a primary driver of tax outcomes.

Sources

1. Tax Foundation – OBBBA State Conformity

taxfoundation.org/state-impact

2. Accounting Today – State Decoupling Trends (March 2026)

accountingtoday.com/news/some-states-are-decoupling-from-obbba-tax-changes

3. Tax Notes – State Conformity Developments (2026)

taxnotes.com/special-reports/federal-and-state-conformity/state-responses-conformity-issues-under-obbba/2026/01/05/7tf49

4. Thomson Reuters Tax & Accounting

tax.thomsonreuters.com/news/nearly-four-months-after-obbba-states-corporate-tax-conformity-patchwork-continues-to-emerge/

5. Crowe – The Patchwork of State Conformity to the OBBBA

crowe.com/insights/tax-news-highlights/the-patchwork-of-state-conformity-to-the-obbba

Additional: BDO, PwC, Grant Thornton, RSM, Bonadio Group (NYS Conformity Watch, 2026)