JEFFERSON CITY, Mo. — To tax tips or not? That is a question that will confront lawmakers in states across the U.S. as they convene for work next year.
President Donald Trump’s administration is urging states to follow its lead by enacting a slew of new tax breaks for individuals and businesses, including deductions for tips and overtime wages, automobile loans and business equipment.
In some states, the new federal tax breaks will automatically apply to state income taxes unless legislatures opt out. But in many other states, where tax laws are written differently, the new tax breaks won’t appear on state tax forms unless legislatures opt in.
In states that don’t conform to the federal tax changes, workers who receive tips or overtime — for example — will pay no federal tax on those earnings but could still owe state taxes on them.
States that embrace all of Trump’s tax cuts could provide hundreds of millions of dollars of annual savings to certain residents and businesses. But that could financially strain states, which are being hit with higher costs because of new Medicaid and SNAP food aid requirements that also are included in the big bill Trump signed.
Most states begin their annual legislative sessions in January. To retroactively change tax breaks for 2025, lawmakers would need to act quickly so tax forms could updated before people begin filing them. States also could apply the changes to their 2026 taxes, a decision requiring less haste.
So far, only a few states have taken votes on whether to adopt the tax breaks.
“States in general are approaching this skeptically,” said Carl Davis, research director at the nonprofit Institute on Taxation and Economic Policy.
A bill Trump signed on July 4 contains about $4.5 trillion of federal tax cuts over 10 years.
It creates temporary tax deductions for tips, overtime and loan interest on new vehicles assembled in the U.S. It boosts a tax deduction for older adults. And it temporarily raises cap on state and local tax deductions from $10,000 to $40,000, among other things. The law also provides numerous tax breaks to businesses, including the ability to immediately write off 100% of the cost of equipment and research.
Forty-one states levy individual income taxes on wages and salaries. Forty-four states charge corporate income taxes.
Treasury Secretary Scott Bessent this month called on those states “to immediately conform” to the federal tax cuts and accused some Democratic-led states that haven’t done so of engaging in “political obstructionism.” Though Bessent didn’t mention it, many Republican-led states also have not decided whether to implement the tax deductions.
“By denying their residents a