Tax Break Legislation Stalls in Blue States
WASHINGTON — Only eight states are progressing with plans to implement tax breaks under President Trump’s significant 2026 bill. Meanwhile, some blue states are holding back on tax exemptions for tips and overtime, as experts have noted.
Democratic-leaning states like New York, Illinois, and California have opted not to incorporate these provisions into their tax laws. This decision has been highlighted by reports indicating a potential multi-billion dollar budget shortfall.
Additionally, other states, both blue and red, have yet to confirm whether they will introduce new legislation that would align with federal tax laws by adjusting the definition of taxable income. States like New Jersey are more lenient regarding certain tax provisions, notably not imposing taxes on tipped workers.
Earlier this month, Treasury Secretary Scott Bessent criticized several blue states, including Illinois and New York, accusing them of blocking beneficial provisions from the “One Big Beautiful Bill,” which is set to begin implementation on January 1st.
Bessent mentioned that this includes key tax exemptions for full-time service workers, overtime allowances for linemen and factory staff, and new credits for seniors who depend on Social Security.
In response, a tax expert argued against the claims made by the cabinet officials, clarifying that Colorado, for instance, does engage in a “rolling adaptation” to align its tax provisions with federal regulations.
The spokesperson for Colorado’s Governor Jared Polis noted that Colorado’s tax code was already closely linked to federal regulations, thus automatically incorporating most changes from the federal bill unless specified otherwise.
Other states that automatically comply with federal tax laws include South Carolina, Iowa, North Dakota, Idaho, Montana, and Oregon.
As some states automatically include new deductions unless legislative action is taken, Michigan is the only state so far to have actively adopted tax cuts for overtime and tips, with Kentucky and North Carolina considering similar measures.
Currently, only four states fully align with Trump’s personal tax cuts for specific provisions: South Carolina, North Dakota, Montana, and Idaho. Oregon and Iowa are expected to comply with three provisions but won’t include enhanced senior benefits.
While Colorado aims to support senior benefits, it will drop overtime premium deductions. Jared Walczak from the Tax Foundation pointed out that there are legitimate reasons some states choose not to automatically follow federal tax rules.
Walczak noted that most states are compliant with federal regulations in many aspects but have not implemented every provision. He emphasized that there’s no clear division between red and blue states regarding tax matters, and these discussions will likely coincide with state budget considerations at the start of the year.
In analyzing the financial implications, Walczak projected significant revenue losses for states like New York, estimating up to $1.7 billion in expected losses.
He cautioned that temporary personal deductions are often inefficient and can lead to substantial expenses, urging states to carefully assess their choices regarding this legislation.
Representatives from the offices of New York Governor Kathy Hochul, California Governor Gavin Newsom, and Illinois Governor JB Pritzker did not return requests for comments.
