Two Democratic-led states, New York and Illinois, are preventing their residents from fully benefiting from key provisions in President Donald Trump's One Big Beautiful Bill. The federal law eliminates income taxes on tips, overtime pay, and car loan interest, while boosting deductions for seniors. However, these states are imposing measures to maintain their revenue streams.
President Donald Trump's recently passed One Big Beautiful Bill, also known as H.R.1, introduces significant federal tax relief for American workers and seniors. The legislation exempts qualified tips, overtime pay, and car loan interest from federal income taxes. It also provides an enhanced $6,000 deduction for senior citizens.
Despite these changes, the benefits do not automatically extend to state taxes in most places. Only four states—South Carolina, North Dakota, Montana, and Idaho—have fully incorporated all the new tax breaks into their codes. Other states, including Colorado, Iowa, Oregon, and the aforementioned four, base their taxes on federal taxable income, allowing most deductions to flow through unless specifically decoupled.
Colorado Governor Jared Polis's office clarified the state's position: “Claims that Colorado is refusing to adopt the majority of tax changes from H.R.1 [One Big Beautiful Bill] are not accurate. All tax cuts in H.R. 1 are automatically incorporated into state tax code unless there is specific action to decouple.”
In contrast, many states use Adjusted Gross Income (AGI) as their starting point, which excludes federal deductions. These require legislative action to adopt the cuts. Adam Michel, director of tax policy studies at the Cato Institute, explained: “Some states start with federal taxable income, so most of the new deductions flow through automatically unless lawmakers opt out. Many more states—blue and red—start with adjusted gross income or run their own tax system, which means they don’t pick up these new deductions unless they affirmatively pass a bill to do so.”
Arizona has already exempted tips from state taxes, with similar proposals in New Jersey and North Carolina. However, blue states like California cite potential budget shortfalls as a reason to forgo adoption. New York and Illinois, which might have seen automatic conformity, are instead mandating an “add-back” for deductions on tips and overtime to safeguard revenues.
This patchwork approach means taxpayers in non-conforming states may not realize the full intended savings from the federal law.
