What are some key state tax implications of the One Big Beautiful Bill (OBBB), and what are some noteworthy past proposals that were not included in this legislation?
H.R. 1, formally titled “An Act to provide for reconciliation pursuant to Title II of H. Con. Res. 14” and commonly referred to as the One Big Beautiful Bill, spans more than 1,100 pages and introduces sweeping changes across the tax landscape.
One previous article took a closer look at how the OBBB affects businesses and tax-exempt organizations, while another explored the effects on individual taxpayers along with estate and gift taxes. In this piece, we focus on the implications on state taxes and past proposals that were not included in the final version of the bill.
What the OBBB Means for State Taxes
The passage of any significant federal income tax legislation often impacts the amount of state income taxes incurred by individuals. This is because state income tax regimes are often directly tied to (or conform with) federal tax law. Many states (but not Pennsylvania) use federal adjusted gross income or alternatively taxable income as their starting point by incorporating the Internal Revenue Code (IRC) in whole or in part into their state law either through:
- Static conformity – a state conforms to the IRC as of a specific date, or
- Rolling conformity – wherein a state law automatically conforms to the IRC
States may further complicate matters by “decoupling” from federal rules in certain areas, like depreciation, by adopting slower depreciation methods or opting out of federal bonus depreciation rules, for example, while adopting most other federal provisions.
Another item for consideration are the various state pass-through entity tax (PTET) workaround regimes developed in response to the TCJA’s $10,000 SALT limitation. Some states included sunset provisions into their laws that would terminate the workaround when the TCJA was set to expire. Careful attention to each state’s specific laws is required.
Taxpayers need to be mindful of these potential federal and state differences when estimating state income tax consequences of the new legislation.
What Didn’t Make the Final Cut of the OBBB?
A number of ideas that were floated by various members of Congress didn’t make it into the OBBB, but it doesn’t mean they won’t be considered in the future. Items not included in the bill include:
- Corporate Tax Rates – A change in corporate tax rates (increase or decrease) was not included in the OBBB.
- Wealth or Billionaire Taxes – Though floated in prior years, there is no provision within the OBBB imposing a tax on wealth.
- Higher Income Tax Rate – Though discussed, there are no provisions imposing a higher income tax rate (such as a return to a 39.6% rate) on high income individuals.
- Net Investment Income Tax – Increases in the tax rate of the net investment income tax have previously been proposed but were not included in the OBBB.
- Carried Interest – Treating carried interest as ordinary income was not included.
- Step-Up in Basis – Ending the step-up in basis on inherited wealth was not included in the OBBB.
- Like-Kind Exchanges – repeal of like-kind exchange treatment on real estate transaction have been proposed in the past but are not included in the OBBB.
- Corporate SALT Deduction – A limitation on the corporate SALT deduction was not included.
- Work Opportunity Credit – An extension of the Work Opportunity Credit (set to expire 12/31/2025) was not included.
- Social Security Taxation – An exclusion of Social Security benefits from income tax was not included.
If you have questions about how the OBBB may affect you or your organization, please reach out to us at [email protected].
This article is part of our ongoing series on the potential impact of the One Big Beautiful Bill. You may view our full library on our OBBB Resource Center.
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