Key Points
- States must decide whether to adopt the new federal tax breaks signed into law by President Trump.
- The new federal law includes tax deductions for tips, overtime pay, and car loans.
- The Trump administration is urging states to opt in, but many are hesitant due to the high cost.
- Adopting the cuts could strain state budgets, which are already facing increased costs for other federal programs.
States across the country are facing a difficult and urgent decision: whether to adopt a slew of new federal tax breaks signed into law by President Donald Trump. The choice will have major consequences for state budgets and for the wallets of millions of Americans.
The new federal law, part of a massive $4.5 trillion tax-cut package, creates new deductions for items such as tips, overtime pay, and car loans. While these breaks will apply to federal taxes, they won’t automatically apply to state taxes in many places. State legislatures will have to vote to “opt in actively.”
The Trump administration is pressuring states to “immediately conform” to the federal changes, arguing that failing to do so will force hardworking Americans to shoulder higher state tax burdens.
But for many states, it’s not that simple. Adopting all of Trump’s tax cuts could save residents and businesses hundreds of millions of dollars, but it would also create a significant deficit in state budgets. This is happening at the same time states are facing higher costs for programs such as Medicaid and food stamps, which are also part of the new federal law.
So far, most states are approaching the decision with caution. “States in general are approaching this skeptically,” said Carl Davis of the Institute on Taxation and Economic Policy. A few states have already rejected certain corporate tax breaks, citing budget concerns.
For now, the question of whether to tax tips and overtime remains a major political and financial headache for lawmakers nationwide.
