How Does Conformity Impact State Revenues After the OBBBA?
Changes in federal tax law reverberate across state budgets, with conformity choices shaping revenues in vastly different ways

State conformity with the Internal Revenue Code (IRC) refers to how states’ tax codes align with the federal tax code. Most states, for ease of administration and compliance, base their state income tax regimes on the federal IRC, either by using federal taxable income as a starting point or by incorporating the IRC in whole or in part.

States take three main approaches to conforming with the IRC:

• Rolling conformity. States with rolling conformity automatically adopt the latest version of the IRC as it is amended. Eighteen states and the District of Columbia use this approach for individual income taxes, and twenty-two states use it for corporate income taxes;¹
• Static or fixed-date conformity. States with static or fixed-date conformity adopt the IRC as of a specific date, and legislative action is required to update their conformity to recent federal tax law changes. Currently, nineteen states follow this approach for individual income taxes, and twenty-one states follow it for corporate income taxes;² and
• Specific reference conformity. A few states adopt only certain IRC provisions or incorporate them by reference in specific state tax statutes. Five states use this approach for individual income taxes, and three states use it for corporate income taxes.³

Even states that conform to the IRC may decouple from certain federal provisions, choosing not to adopt these provisions or modifying them in their own tax codes.

Common Conformity Variances

Federal tax legislation: Never has conformity been a more significant issue than with the passage of the recent One Big Beautiful Bill Act (OBBB). Historically, some states have decoupled from specific code sections, but this legislation substantially altered many IRC sections. States will analyze the impact these changes will have on state revenues and modify budgets accordingly.

Some of the most significant issues include:

• Research and experimental expenditures under Section 174. With the return to immediate deduction of domestic research and development (R&D) expenses, states will need to reevaluate their own R&D programs. The election to accelerate unamortized amounts of previously capitalized costs incurred in 2022 through 2024 will also impact state revenues;
• Bonus depreciation under Section 168(k). The return to 100 percent bonus depreciation could impact state revenues where rolling conformity automatically updates the state rules. Expanding the scope of qualified assets to include manufacturing buildings placed in service before January 1, 2031, further reduces revenues based on conformity;
• The business interest limitation under Section 163(j). Redefining the deduction limitation to reference adjusted taxable income based on EBITDA (earnings before interest, taxes, depreciation, and amortization) would impact state deductions beginning in 2025. One nuance involves separate entity pro forma calculations and tracking state differences from federal carryforward amounts. Any changes to federal Section 163(j) limitations not adopted by states will add complexity;
• Qualified business income under Section 199A. The final version of the OBBB did not change the tax rate for this deduction but made it permanent. This consistency assists states with budget planning;
• State and local tax (SALT) cap changes. Temporarily increasing the federal cap on the SALT deduction from $10,000 to $40,000 for 2025 through 2029 will have an immediate impact on revenues. Because most state legislatures have concluded their sessions, supplemental sessions may be necessary. The new federal limitation excludes state pass-through entity tax deductions, which in some states will expire this year, following the expiration schedule for the Tax Cuts and Jobs Act;
• Foreign income provisions under Sections 951A and 250. Multinational corporations face definitional and operational changes to rules about the inclusion of foreign-sourced income in federal taxable income. These changes flow through to state taxable income depending on conformity rules; and
• Inflation Reduction Act credits. Generating, selling, and using credits excluded from federal taxable income under the Inflation Reduction Act of 2022 may still be includible in states with lagging (static) conformity dates, affecting both tax base and sales factors.

Other conformity disconnects include state net operating loss calculations, statutes of limitation, credit utilization order, basis calculations, and filing dates. The elimination of income tax on certain tips and overtime income under the OBBB will also present challenges for states, depending on whether they use federal taxable income or adjusted gross income as a starting point.

What Will States Do Now?

Disconnects between federal and state tax codes will become more apparent as states react to federal cuts to state programs, as well as to the tax cuts in the OBBB. To fill holes in their budgets, states will need to assess changes to income, sales, and property tax regimes. Although states are still digesting the impact of the OBBB, it is expected they will make adjustments in the next fiscal year. Several states are already considering or enacting changes.

California

California currently conforms to the IRC as of January 1, 2015, thus excluding ten years of tax changes. A recent proposal, Senate Bill 711, would advance conformity to January 1, 2025, but would omit changes established by the OBBB. As usual, California also proposes decoupling from certain provisions, including those pertaining to R&D expenditures, alternative minimum tax, and net operating losses.

Hawaii

Hawaii has included a $200 million reserve in its current budget⁴ to buffer against potential federal budget cuts. This reserve will be deposited into the state’s Emergency and Budget Reserve Fund—its “rainy day fund.”

Illinois

Anticipating deep cuts, Illinois Governor J. B. Pritzker signed5 what was called “the best budget they could manage in a difficult year.” The governor was granted authority over a new $100 million emergency fund, and the budget also increased funding for safety-net hospitals.

Conclusion

The issue of conformity will play a large role in determining the state impact of the OBBB. Most of the tax changes in the bill have varying degrees of importance to states, depending on conformity date. Many provisions are effective in 2026, which will give states some time to consider the impact. The 2026 state legislative sessions will be instrumental in determining whether states conform, decouple, or selectively adopt the federal changes.

Mark Nachbar is a principal in national tax services, and Mary Bernard is director in national tax services at Ryan.

Endnotes

1. AICPA Map of States’ Conformity to the Internal Revenue Code, AICPA, July 18, 2025, www.aicpa-cima.com/advocacy/download/aicpa-map-of-states-conformity-to-the-internal-revenue-code-irc.
2. AICPA Map.
3. AICPA Map.
4. As of June 30, 2025, House Bill 300 is still being negotiated.
5. On June 16, 2025, Governor J. B. Pritzker signed the spending measure, Senate Bill 2510; the revenue and tax changes bill, House Bill 2755; and the budget implementation bill, House Bill 1075.