Expect State Disparities in Conforming with New Federal Tax Law

As seen in Bloomberg Tax: https://news.bloombergtax.com/tax-insights-and-commentary/expect-state-disparities-in-conforming-with-new-federal-tax-law

State governments across the country are preparing for the ripple effects of the sweeping federal tax package signed into law July 4. Federal changes often trigger a complex chain reaction at the state level because many states piggyback on the federal tax code to administer their own income taxes.

Whether a state automatically adopts the changes in the $3.4 trillion tax package or chooses to decouple depends on its approach to federal tax conformity—a critical concept in state tax policy.

Conformity methods and budgeting timelines will dictate how—and how fast—states respond. Expect significant policy movement in the months ahead, as states evaluate the sprawling tax law and decide how it fits into their broader fiscal strategies.

In the meantime, businesses should work with advisers to track developments closely, particularly around major provisions such as bonus depreciation, research and experimentation costs, and business interest expense.

Understanding Conformity

When it comes to tax conformity, states generally fall into one of three categories: rolling, static, and selective.

States with rolling conformity automatically conform their tax codes whenever changes are made to the US tax code. These states adopt federal changes in real time unless their legislatures take specific action to decouple. States such as Colorado and Minnesota adhere to this approach, providing predictability to taxpayers.

For taxpayers in these states, the provisions in the tax package may already be in effect unless the state legislature intervenes. Businesses should be alert for guidance or emergency legislation that could suspend certain provisions, such as the new bonus depreciation rules, especially if state policymakers decide the new federal tax law’s provisions are inconsistent with state budget goals.

Static-conformity states conform to the federal tax code as it existed on a specific date, essentially freezing their link to federal law. These states must pass legislation to update their conformity date or remain disconnected from the changes. For example, California conforms to the tax code as of Jan. 1, 2015, creating uncertainty about their adherence to the latest federal tax package.

When a state’s conformity date predates the latest tax law, the new federal changes won’t apply to state returns unless and until the state legislature acts. This often leads to a lag between federal and state law, which can create mismatches in taxable income and deductions, as should be anticipated with the new research and experimental expenditure changes.

Selective-conformity states only adopt specific provisions of the federal tax code. Instead of wholesale adoption, they choose which parts to follow.

In these states, such as Pennsylvania for personal income tax, officials evaluate each federal provision, deciding which to incorporate and which to ignore. This approach allows states to tailor their tax policy more precisely, but it also can make compliance more complex for businesses operating in multiple jurisdictions.

Timing Is Everything

Almost all US states finalize their budgets in June, ahead of the typical July 1 fiscal year start. This timing complicates state responses to federal tax changes—especially those beginning in 2025. Legislatures may need special sessions or may delay action until next year to determine whether to conform or decouple.

For taxpayers, this creates a period of uncertainty, as states may announce decisions mid-year or even retroactively, potentially affecting already-filed returns.

Retroactivity

One key issue for states responding to the new federal tax law is whether to make conformity changes retroactive. Legislatures sometimes pass laws that apply to tax years already underway.

States considering retroactive conformity to the new tax package will weigh the potential revenue gains against the administrative and political challenges of imposing changes after taxpayers have already acted under the old rules.

Businesses should monitor legislative developments closely and be prepared for possible amended returns, additional payments, or potential refund opportunities.

Looking Ahead

States will analyze the provisions of the new tax law in light of their policy goals and fiscal needs. No state conforms to every aspect of the US tax code but instead provides their own set of additions, subtractions, and modifications.

Consequently, taxpayers should expect a mix of approaches across the country, with some states embracing many of the federal changes and others rejecting them.

Businesses operating in multiple states will need to track each jurisdiction’s response closely to ensure compliance and take advantage of any planning opportunities.

For more information, please contact Alan Goldenberg, Principal and Leader of Anchin’s State and Local Tax and Tax Controversy groups, or your Anchin Relationship Partner.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.