Even though the One Big Beautiful Bill Act has been the law of the land since July, several states are revolting against some the tax provisions, which is causing the Treasury Department to clap back.
"In a blatant act of political obstructionism, liberal strongholds like Colorado, New York, Illinois, and the District of Columbia are deliberately blocking their own residents from receiving these historic benefits at the state level," said Treasury Secretary Scott Bessent.
"By denying their residents access to these important tax cuts, these governors and legislators are forcing hardworking Americans to shoulder higher state tax burdens."
The states maintain the moves are for financial reasons, not political.
"Many states are decoupling from OBBBA provisions to avoid significant revenue losses," said Lucy Dadayan, principal research associate at the Tax Policy Center, Urban Institute & Brookings Institution.
"Many of the new federal deductions and expensing rules under OBBBA would reduce the federal tax base that states use for their own tax calculations."
States retain an option on whether to conform their tax policies with federal law.
Basing state tax laws on federal tax laws is complicated by some states using federal adjusted gross income versus federal taxable income as a basis for determining state tax. Eight states have no income tax.
About half the states use a rolling basis for conforming which is akin to automatic while the others use a static basis that's tied to specific dates. Thirteen states use selective conformity where they pick and choose conforming provisions.
"If a state automatically adopted those provisions, it could shrink its corporate or individual income tax collections, creating budget gaps that would have to be filled elsewhere," said Dadayan.
OBBBA raised the deduction on state and local taxes, a move cheered by some muni issuers. Many states also employ "pass through exemption" workarounds that allow business owners to avoid the deduction caps.
"Raising the SALT cap under OBBBA plays some role, but not a central one, in states' conformity and decoupling decisions, and it interacts closely with the PTE tax workarounds many states adopted," said Dadayan.
Thirty-six states have created pass through entity exemptions to avoid the cap on state and local tax deductions.
Disputes over SALT calculations are taking a back seat to other disagreements to Republican-touted campaign promises.
New York and Illinois are both objecting to OBBBA's "no tax on tips" provision
In October, California enacted legislation changing its conformity date and elected to ignore any provisions from OBBA.
Michigan and Pennsylvania are not paying attention to the immediate expensing of domestic R&E expenditures, the new depreciation allowance for qualified production property, and the business interest expense limitation.
Delaware is opting out of bonus depreciations, and the District of Columbia will not comply with corporate income tax changes.
In September Colorado called in a special legislative session that halted its rolling conformity on qualified business income deductions.
Rhode Island led the way for the rest of the states in June by decoupling from all aspects of OBBBA.
The defections could lead to an impactful dilution of the legislation's fiscal goals.
"With several states decoupling from major OBBBA provisions to protect their budgets, some of the law's intended effects at the state level will likely be limited," said Dadayan.
"The federal changes still apply nationwide, but their impact across states is not going to be uniform."
The Trump administration is already upping the ante in the conformity game.
"We call on these holdout states to immediately conform and stop punishing their citizens for partisan games," said Bessent.
"The American people voted for bold change, not bureaucratic roadblocks. Treasury stands ready to work with any state committed to delivering on that promise, but we will not stand idly by as this obstructionism drags down the national recovery."
