States Still Decoupling From GOP Tax Law Deep Into Filing Season

Tax-filing season is well underway, and yet many states are still figuring out whether to conform to or decouple from provisions in last year’s GOP-led tax overhaul, especially the deductions and other breaks for corporate taxpayers. The upshot is one of the more complicated filing periods in recent years.

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Corporate taxpayers are watching which states reject federal tax policy changes, such as those related to immediate expensing for research and development or property investments. Just in the past week, lawmakers in Republican-controlled states like Florida and Democrat-led states like Oregon moved ahead in decoupling from some of those corporate tax provisions to preserve billions of dollars in state revenue.

Then there’s the unique situation in Washington, DC, where a local law severing the city’s tax code from more than a dozen provisions in the 2025 federal tax rewrite was met with Congress’s formal disapproval. That set off a dispute between Capitol Hill and city leaders over whether the district’s decoupling measure is in effect. (DC officials say it is.)

Most of all, corporate taxpayers are looking for clarity from the states as they plan their filings, Scott Roberti, a managing director focusing on state and local tax in EY’s national tax practice, says on this week’s episode of Talking Tax. Roberti tells Bloomberg Tax editor Benjamin Freed that so far, at least 17 states have issued some sort of guidance on the conformity issue. Roberti hopes the remainder finish up soon in time for the end of filing season and quarter-end accounting.

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This transcript was produced by Bloomberg Law Automation.

David Schultz:

From Washington, I’m David Schultz, and this is Talking Tax.

It’s been eight months since Donald Trump signed into law the Republican Tax and Spending Package, also known as the One Big Beautiful Bill Act, or if you’re into acronyms, OB3. Numerous states balked at some of the tax law’s provisions and have attempted to decouple their respective tax codes from the federal code. In fact, some states are still attempting to do this, even though tax filing season is well underway.

Today we’re going to get into why this is happening and what it’s looking like for taxpayers on the ground with Scott Roberti, a managing director at EY who specializes in state and local taxes. He spoke with Bloomberg Tax editor Benjamin Freed about how the state response to this legislation differs from the one passed under the first Trump administration, the Tax Cuts and Jobs Act, or TCJA.

First, Roberti started by talking about what he’s telling EY’s clients.

Scott Roberti:

You know, as we look to advise our clients, one of the things they look for is guidance from the states. And, you know, as we all know, the starting point for corporate state taxes is the federal tax return and how a state’s going to conform to those federal changes in the One Big Beautiful Bill is critical. But many states are still in session. We’re tracking over 8,500 tax bills across all tax types. And one big part of that is, you know, how states are going to conform. We have about 17 states now that have actually issued some form of guidance. The rest of the states have some sort of proposal on the table on how they’re going to decouple. And I’m hopeful in the next two to three months, the states will finish up their sessions and address this because it’s not only filing tax returns. We also have quarter-end accounting adjustments that need to be made as well that are indicative of what the state law is going to be.

Benjamin Freed:

What are some of the more common features of the federal law that you’ve seen states either, you know, want to conform to or want to decouple from? I know there are some business deductions that states have seen as a way to actually grow some revenue.

Scott Roberti:

Yeah. So I like to look at this. Let’s go back to TCJA and we think about it from a state tax perspective, right? It was mainly base expansion. With the number of the provisions that were put in place, we had the deemed repatriation. And obviously the benefit on a federal side was, you know, lower corporate tax rate, taking the corporate tax rate down to 21%, which obviously doesn’t impact the state. So the states were looking at a revenue pickup. It’s a little bit different here with OB3 because OB3 looks to accelerate deductions. You know, think about research and experimentation. Think about depreciation. But layered on top of all of that is the fact that on the sort of federal transfer side to the states, the federal government is completely changing Medicaid and SNAP, right? And while that’s not a tax issue, that’s going to have a fiscal issue to the states. And the states in some cases are looking to those that benefited from the OB3 tax changes to pay for some of those sort of lack of federal transfers, which will take effect in fiscal year 27.

We’ve seen a lot of changes, or a number of states considering changing their conformity rules, right? I’ll just use Virginia as an example. As we all are fully aware in 2025, they paused or suspended their rolling conformity. And then just recently, a week and a half ago, enacted House Bill 29, which goes to fix conformity retroactive to December 31st, 2025, right? So states are reevaluating how they conform to the federal tax code because in seven years, we’ve had really sea changes in what federal tax conformity looks like.

Benjamin Freed:

I mean, compared to TCJA in 2017, some of the changes that happened under the Biden administration, is this cycle more or less difficult to navigate?

Scott Roberti:

It’s really interesting, right? I mean, if I sort of think about probably the biggest one we’ve been spending a lot of our time on with our business clients is around the research and experimentation, right? The immediate expensing and really what I’ll say, the retroactive expensing back to calendar year 2024. What we’re seeing the trend here is states are decoupling from those provisions, right? Unlike the federal government, as we all know, the states have to balance their budgets on an annual basis, right? So doing anything retroactively is very difficult for them.

At the same time, we have states recognize, and I’ll just use Governor Healey in Massachusetts and the address that she put out with regard to conformity, decoupling from the tax changes in the federal tax bill. She acknowledged that the R&E expensing really benefited the life sciences companies, which is a pillar of the Massachusetts economy. So her proposed bill, not law yet, calls for, I’ll just say like a bifurcation, right? We’re not going to conform to the immediate expensing provisions, but we’re going to conform a couple of years out, which allows us from a fiscal point of view to plan, right? So it’s not a perfect answer if you want strict conformity, but it’s sort of a realization that, me as governor, in this case, Governor Healey, I have to balance our budget and take action along these lines. So that’s just one example, but we’ve seen a lot of states go that way.

Benjamin Freed:

I want to talk about two other examples that are still a little bit more up in the air because there is a political jockeying over the conformity issue in these places. I’m thinking of Arizona and DC. In the case of Arizona, you’ve got the governor and the legislature kind of disagreeing over what conformity package to pass. And I guess they went ahead and printed up some tax forms before anything was settled. And then obviously in DC, we have the DC council passing a law that decoupled from several of those business deductions that you mentioned, including R&D, and only for Congress to try to overturn it. There’s now disagreement over what did Congress do it in time? Is the DC law in effect? When things like these going on, what do you tell your clients that have to file in these places?

Scott Roberti:

Yeah, it’s very difficult, right? You have to sort of bifurcate the sort of political noise that you’re hearing, right? The jockeying that’s going on, to sort of use that term, from what is actually the law today, right? So let’s just use DC as an example. Right now, we know the temporary law that’s put in place by DC stands, right? And those forms have been printed. And that’s where our focus has been in guiding our clients. If that changes, if there is legal action, we continue to follow that on a day-to-day basis and we may or may not adjust, depending on what the court rules, on how we advise our clients on how to file and so forth. But yeah, DC is just unique, right? Because of its home rule, because of the oversight from the federal government. Quite frankly, this is historic. We’ve never seen it before on tax issues.

The other states, these debates are ongoing, especially in states that are not controlled by a single party. How that plays out, it’s again, monitoring the situation, again, separating what’s the actual law versus what the political discussions are. I think the political discussions are important, right? I think we continue to follow those. But again, getting back to what does the law specifically state? What’s the law today? How do you file your tax return today? How do you file your estimates today? And if we get to the end of the first quarter, how do you file your provisions for the end of the first quarter?

Benjamin Freed:

Let’s move away from conformity for a minute, because I know there are some other big hot button tax issues running through the states right now. The first one that comes to mind is tax bills related to data centers. We’ve seen everything from tighter controls on how they can qualify for tax breaks to full rollbacks. What are you seeing on that front? Are data center operators, are they at risk of losing some of these tax breaks they’ve enjoyed for many years?

Scott Roberti:

Yeah, it’s a really interesting, hot area, no pun intended, right? With the evolution of AI and quantum computing and this absolute need for these data centers, I think there’s potential for 3,000 to 5,000 sites across the US alone. That number goes up significantly worldwide. And there have been incentives around that, typically around the sales tax area, exempting those types of purchases from sales tax. And we’ve seen a bill now percolating in the Colorado legislature that provides for sales tax exemptions, but then has other provisions in it with regard to, again, these are not tax related, water usage for the cooling of the data centers, energy usage. So that’s one bill that’s out there, and there’s bills across the country.

Let’s juxtapose that maybe with Washington, which has a bill in place to repeal the sales tax exemptions associated with data centers. Again, they’ve looked at it, and from their point of view, the proliferation of data centers, they feel that that’s the direction to go in. So I think as that continues to evolve, there’s more and more learning around what having a data center in your community means. Yeah, I think our tax incentives associated with that will continue to evolve.

The sales tax exemptions are only one element to it, and sales tax exemptions have been used for decades by state and local governments to incentivize new investment, with the understanding that there is going to be long-term benefit of having that investment in the state, whether it’s larger property tax collections, whether it’s larger footprint of employees, those types of things. Maybe it’s a concentration of new development around those data centers that are looking to utilize the data center, right? So I think that all has to play out, and as it does, I do expect state policymakers to sort of evolve their thinking around that and how they incentivize those types of investments in their state.

Benjamin Freed:

I just want to ask one more question related to sales tax, since you mentioned it when we were arranging this interview, we are seeing some efforts to expand sales tax bases around the states. This is maybe happening in concert with efforts to scale back property and income taxes, but is the sales tax base expansion, are we going to see more of that?

Scott Roberti:

I think so. Whether you want to call it modernization or the expansion of the sales tax base into more of the service economy, I think that trend continues and we see bills around the states that focus on that. I would say since we spoke, one of the other areas that we’re seeing, really two other areas, think about Georgia and their effort to reduce or eliminate their personal income tax and pay for it through the elimination of corporate tax credits and exemptions. Again, it’s this shift from taxing income to taxing services and things of that nature.

Also property tax reform. I mean, Florida is sort of leading the path on this and there’s probably about 10 to 12 states that have some sort of major property tax reform bill in play. Part of that’s driven by the fact that housing costs continue to increase, and although we’ve seen a slowing of that, but the property taxes associated with it, right, obviously increase. And if we look at government spending and property taxes, as the largest tax collected by the states to pay for that, continue to increase as well, we’re seeing property tax burdens become a hot button issue across the states.

David Schultz:

That was Scott Roberti, a managing director at EY, speaking with Bloomberg Tax editor Benjamin Freed. And that’s it for today’s podcast. You can find up-to-the-minute news on the latest tax and accounting developments at our website, news.bloombergtax.com. That website, once again, is news.bloombergtax.com.

Today’s episode was produced by myself, David Schultz, and our editor was Andrea Vittorio.

From Washington, I’m David Schultz. Thanks for listening.