State Implications of the One, Big, Beautiful Bill

As the US House hashes out its “One, Big, Beautiful Bill,” statehouse lawmakers are watching closely, given the impact of both its tax and spending provisions on state budgets. At least one newly proposed deduction—for car loan interest—would flow through to most states’ taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. systems absent a decoupling from federal law, and some states could see multiple new tax provisions hit their income tax bases.

Meanwhile, proposed changes in cost sharing for Supplemental Nutrition Assistance Program (SNAP) benefits would increase states’ obligations, and certain states could experience a reduced federal match rate for Medicaid expansion. Simultaneously, proposed work requirements and other changes in Medicaid eligibility will reduce enrollment, which would, by default, yield a substantial cost savings to states, which share these costs with the federal government. If, however, some states chose to expand their own social safety nets to provide benefits to those excluded from federal coverage, costs would run sharply in the other direction.

The tax changes could have an immediate effect, as they apply to the current (2025) tax year. Benefit cost-sharing changes would kick in as of federal fiscal year 2028. Select provisions of note for state lawmakers include:

• Making the current higher standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. permanent and temporarily increasing it by $1,000 (single) / $2,000 (joint)
• Providing a deduction for car loan interest
• Exempting qualified tips from income taxation
• Exempting premium pay overtime from income taxation
• Increasing the Section 179 expensing cap from $1 million to $2.5 million
• Temporarily extending full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. under Section 168(k)
• Increasing the state share of SNAP benefits and administrative costs, with “quality control” provisions that reduce federal payments in states with high error rates
• Imposing Medicaid work requirements, adjusting Federal Medical Assistance Percentage (FMAP) rates for states which adopt future Medicaid expansion, restricting future use of provider taxes, and reducing the expansion FMAP for states which enroll undocumented immigrants with own-source revenues

Many additional provisions will be of great interest to states’ residents, of course, but their effects on state budgets are less direct. Raising the SALT deduction cap would have limited direct impact on state budgets—though some states cap property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. deductions against their state income taxes in accordance with the federal cap—but might be of fiscal significance in other ways, especially since the bill also strips away the protections afforded by states’ pass-through entity-level tax regimes. Various other federal spending cuts could have an impact as well, in some cases eliminating programs to which states also contribute funds (resulting in savings), but also potentially leading states to fill the void in some way, yielding additional expenditures. Proponents and opponents of these provisions also differ on their effect on the broader economy, which is of course significant for state tax collections. The indirect effects of such policies are significant but beyond the scope of this analysis.

The following table provides estimated costs of the above-mentioned tax provisions if states incorporated them into their own income tax codes. Figures in bold are those which would be incorporated by default whenever the state conforms to the latest version of the Internal Revenue Code (IRC), which 22 states do on a rolling basis. Figures not in bold represent estimated revenue losses should states make special legislative provision to match these new federal policies. They would not be incorporated automatically—even if lawmakers update their static (fixed-date) IRC conformity date to match a version of federal law inclusive of these new provisions.

We estimate that, if all states had conformity dates matching the proposed new law, these tax changes would reduce state income tax revenues by $3.3 billion in aggregate in tax year 2026, representing a 0.7 percent reduction in state-level individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. collections. There may, however, be political pressure for states to parallel some of these provisions, particularly the exemptions for tips and overtime pay. If all states willingly incorporated each of these provisions, we estimate an annual revenue reduction of $20.5 billion, or 4.2 percent of states’ income tax collections.

These estimates involve a variety of simplifying assumptions, spelled out in a concluding set of methodological notes. They should be regarded as providing a general sense of the cost of these provisions by state but would not match the accuracy of state revenue departments’ estimates using proprietary state data or involving a greater degree of state-specific fine tuning.

Table 1. State Income Tax Costs of Incorporating the “One, Big, Beautiful Bill” Tax Provisions ($ Millions)

Notes: Provisions which would be incorporated with up-to-date IRC conformity are in bold. Provisions that would require separate legislative adoption are not bolded. See methodology for assumptions and methods.

Sources: US Bureau of Labor Statistics; Internal Revenue Service; US Department of Agriculture; US Census Bureau; New York Federal Reserve Bank; Edmunds; Tax Foundation calculations.

Increased Standard Deduction

Under the House Republican tax plan, the higher standard deduction levels established under the Tax Cuts and Jobs Act (TCJA) are made permanent, with a temporary boost of an additional $1,000 for single filers ($2,000 for joint filers) for tax years 2025-2028. Eight states (Arizona, Colorado, Idaho, Missouri, New Mexico, North Dakota, South Carolina, and Utah) and the District of Columbia conform to the federal standard deduction and thus are potentially in line to boost their own standard deductions temporarily as well, at an aggregate cost of $636.5 million in 2026. This does not include the cost of making the current standard deduction permanent in comparison with reverting to a lower level.

Three of these states (Arizona, Idaho, and South Carolina) have fixed-date conformity, and thus would not incorporate the higher standard deduction until they updated their conformity date by legislation. Utah provides a tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income rather than the taxpayer’s tax bill directly. worth 6 percent of the federal standard deduction amount. The federal budget legislation also creates a temporary additional $4,000 bonus for senior citizens, which would cost states about $7.6 billion per year in aggregate if they all adopted similar plans, but no state is currently in line to incorporate the provision.

No Tax on Car Loan Interest

Under the budget bill, personal passenger vehicle loan interest is deductible up to $10,000 per year, with a phaseout for high earners beginning at $100,000 in income ($200,000 for joint filers). This provision reduces adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” , so it would flow through to all states that conform to a current version of the IRC. Of states with an income tax, only Arkansas, Mississippi, New Jersey, and Pennsylvania calculate income tax liability separate from an IRC base, though many states have fixed-date conformity—some several years out of date—and thus would not capture the deduction unless they updated their conformity date. If all states with IRC conformity provided this deduction, it would reduce aggregate state tax collections by $2.2 billion in 2026.

No Tax on Tips

Consistent with one of President Trump’s campaign pledges, the House tax plan exempts qualified tips from income taxation for tax years 2025-2028, structured as a deduction available to itemizers and non-itemizers alike. To limit tax avoidance, a qualified tip is defined as a cash tip received as an individual in an occupation “which traditionally and customarily received tips on or before December 31, 2024,” with exclusions for highly compensated employees. Only states that begin their income tax calculations with federal taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. rather than adjusted gross income—Colorado, North Dakota, and (subject to a conformity date update) South Carolina—would incorporate this exemption automatically. However, the policy has been introduced through legislation in numerous states, despite the tax benefit being poorly targeted. Among workers in the bottom half of hourly wages, only 4 percent are in tipped professions. Our estimates show a $0 impact for North Dakota even though the state would be in line to incorporate the provision and thus experience some amount of revenue loss, because we estimate revenue effects by applying the blended state rate applied to taxable income of $20,000 – $40,000, and North Dakota’s lowest rate (1.95 percent) does not kick in until $48,475 in taxable income above the state’s federal (currently $15,000) standard deduction.

No Tax on Premium Pay Overtime

The legislation makes the premium portion of overtime deductible for both itemizers and non-itemizers for tax years 2025-2028, with some exclusions, such as for highly compensated employees. As with the tips deduction, this provision would only flow through automatically to the three states that use federal taxable income as their income starting point. In South Carolina’s case, the provision would only apply when the state updates its fixed conformity date. Across these three states, exempting the premium portion of overtime could generate losses of $450 million in 2026, and if all income taxing states adopted a similar exemption, the annual cost would exceed $11 billion. The actual cost could be even higher, because the preferential treatment of overtime would create incentives to shift more work to premium overtime rather than hiring additional workers, and might also lead workers to find creative ways to characterize more of their income as qualifying overtime pay.

Other Tax Provisions

Raising the Section 179 small business expensing cap to $2.5 million is a pro-investment policy with a relatively light revenue impact on states conforming to the provision. Similarly, restoring and temporarily extending corporate full expensing under Section 168(k) will generate modest revenue losses for the states conforming to this pro-growth provision, but it only restores the expensing levels to which these states conformed for several years before the current phasedown began. A higher estate tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. will only affect Connecticut, the sole remaining state to use the federal exemption in its own estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. calculations.

SNAP Cost Sharing

Under the budget bill, states assume responsibility for a greater share of SNAP expenditures as of FY 2028, which proponents see as incentivizing better program administration, but which also shifts more costs down to states. Administrative costs vary widely by state and are currently split equally between federal and state governments. Under the proposal, states’ share of administrative costs will increase to 75 percent, a shift of about $2.8 billion using the most recent available data (not grossed up to FY 2028). Additionally, states would, for the first time, shoulder a portion of the cost of food benefits. Under a new “quality control incentive,” states would be responsible for between 5 and 25 percent of benefit costs, based on their rate of erroneous payments.

In FY 2023, 28 states had double-digit error rates, which would be enough to trigger a 25 percent cost share. Using error rates for that year, based on most-recent enrollment and benefit cost data, states’ greater responsibility for benefits payments would run $19.8 billion, for about $22.7 billion in total additional SNAP costs. Other federal changes are intended to provide cost savings which, if successful, could reduce this amount somewhat. Similarly, if states respond to the quality control incentive by reducing the rate of erroneous payments, that will also yield lower costs. If all states secured the lowest possible share, their responsibility for benefits payments would drop to $4.6 billion, less any direct savings from a lower error rate.

Medicaid Reductions for States Covering Undocumented Immigrants

Undocumented immigrants are ineligible for any federal Medicaid benefits, but certain states choose to provide medical coverage for undocumented immigrants using own-source revenues. These state expenditures do not affect the federal budget, but the pending legislation nevertheless imposes a penalty on states providing such benefits. Under the proposal, these states would have the FMAP for ACA Medicaid expansion enrollees reduced from 90 to 80 percent, beginning FY 2028. Barring a recission of such programs, this provision would reduce funding for California, Colorado, Connecticut, Maine, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont, and Washington, while automatically terminating Medicaid expansion in Illinois and Utah based on state laws withdrawing from the program if the federal match declines. We estimate that the reduced match would cost these states an aggregate $9.4 billion in FY 2028 if they continued to provide Medicaid-like programming for undocumented immigrants.

The House budget contains other significant Medicaid changes as well. Provider taxes, historically used by states to increase their Medicaid match, will be harder to expand in the future. The bill also imposes a work requirement, which is likely to result in a large reduction in Medicaid eligibility. Because states are responsible for a substantial share of Medicaid expenditures, any reduction in eligibility would yield dramatic state savings. If, however, states sought to offset these reductions with their own resources, the additional cost to state coffers would be substantial.

Table 2. Additional State SNAP and Medicaid Expenditures Beginning FY 2028 ($ Millions)

Notes: Changes to both SNAP and Medicaid begin FY 2028. SNAP data are calculated based on most recent available data on enrollment and costs and are not adjusted to FY 2028. Medicaid costs are for FY 2028, adjusting current data by CMMS forecasts.

Sources: US Department of Agriculture; Centers for Medicare & Medicaid Services; Tax Foundation calculations.

Concluding Notes

Among tax provisions, only the car loan interest deduction broadly flows through to states, and lawmakers may wish to decouple from this provision, which offers scant economic benefit. There are additional modification considerations in the three states which begin their income tax calculations with federal taxable income. For most states, however, the direct impact of the “One, Big, Beautiful Bill’s” tax provisions are likely to be minimal, with the reduction in SNAP benefits of greater interest. Nevertheless, with state tax collections growing 19.4 percent in real terms since 2017, and increasing by 50 percent over the past two decades, most states should be able to absorb the direct impact of the budget bill with little difficulty. Indirect impacts, like Medicaid reductions that some states might opt to offset within their own budgets, involve much more prodigious sums. Additionally, broader economic considerations, particularly any possible tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. -induced economic downturn, loom as a potential threat to states’ fiscal health.

Methodology

Increased Standard Deduction: Total estimated US reduction in federal taxable income is allocated to states based on their 2023 share of standard deduction claims, adjusted by variance in the value of the standard deduction per claimant, using IRS Statistics of Income data. Income tax revenue losses are calculated against a blended marginal rate for each state across $60,000 – $80,000 in taxable income. Estimate does not account for state phaseout provisions (e.g., Colorado).

No Tax on Tips: Total estimated US reduction in federal taxable income is allocated to states using each state’s share of total annual compensation for full-service restaurant workers as a proxy for the distribution of tipped professions across the country, using data from the BLS Quarterly Census of Employment and Wages. Income tax revenue losses are calculated against a blended marginal rate for each state across $20,000 – $40,000 in taxable income.

No Tax on Overtime: Total estimated US reduction in federal taxable income is allocated to states according to their share of total state compensation from key overtime-earning sectors weighted by assumed shares associated with premium overtime pay: 1.2 percent for Construction; 1.3 percent for Manufacturing; 1.1 percent for Health Care; 0.8 percent for Trade, Transportation, & Utilities; 1.6 percent for Mining and Natural Resources; and 0.7 percent for Retail, via BLS Quarterly Census of Employment and Wages data. Income tax revenue losses are calculated against a blended marginal rate for each state across $60,000 – $80,000 in taxable income.

No Tax on Auto Loan Interest: Total estimated US reduction in federal adjusted gross income is allocated to states according to a share calculated using New York Fed data on outstanding auto loan principal per capita, for which annual interest payments are derived using the average of new and used car loan APYs by state from Edmunds. Income tax revenue losses are calculated against a blended marginal rate for each state across $60,000 – $80,000 in taxable income. The total reduction takes the phaseout into account, but no effort is made to adjust for variations in the share of taxpayers subject to phaseout across states.

SNAP Cost Sharing: Increased admin costs calculated using SNAP administrative costs per (household) case per month multiplied by the number of households enrolled as of February 2025, with an additional 25 percent share of admin costs shifted to states. Additionally, states are assigned a share of total food benefits payments (using FY 2024 data) under the Quality Control Incentive, which assigns cost sharing of 5-25 percent based on state payment error rates. For these calculations, states are assigned the error rate in the latest available (FY 2023) USDA data.

Medicaid FMAP Reduction for Coverage of Undocumented Immigrants: June 2024 Medicaid data for VIII Group enrollees are adjusted by current baseline projections to yield FY 2028 estimates, from which an additional state share is calculated.

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