The Patchwork of State Conformity to the OBBBA

State tax professionals are navigating a uniquely unsettled period. Although the OBBBA was enacted on July 4, 2025, and the filing season is underway, its state tax implications remain uncertain and, in many cases, unresolved. As legislatures return to session in the coming months, they will determine whether to conform, selectively decouple, or adopt state-specific tax approaches. Until then, taxpayers are operating in an awkward interim environment.

Conformity comes at a cost

Because most state corporate income tax systems are built on federal taxable income, changes to the IRC can create widespread state-level disruption. Not since the Tax Cuts and Jobs Act of 2017 (TCJA) has the IRC undergone changes as significant as those made by the OBBBA. State tax treatment of the OBBBA provisions depends on how a state conforms to the IRC, including rolling conformity, fixed-date conformity, and selective conformity.

When the OBBBA was enacted, many states already had finalized their fiscal year budgets based on established revenue projections. The federal changes prompted states to reassess those projections and model the potential impact of conformity. In numerous cases, full adoption would materially reduce anticipated revenues and create budget shortfalls. As a result, conformity decisions are being shaped not only by tax policy considerations, but also by immediate fiscal constraints and balanced-budget requirements.

The illusion of simplicity: State responses to the OBBBA

At first glance, state conformity appears straightforward: a state either adopts federal changes or it decouples. In practice, however, the reality is far more nuanced. States can adopt some OBBBA provisions while rejecting others, conform for one tax year but not the next, or create entirely state-specific regimes that modify or replace federal treatment.

Crowe observation

The result is not a binary system of conformity or decoupling, but a patchwork of partial conformity, selective decoupling, and state-specific rules, often layered on top of existing conformity frameworks.

This complexity creates significant compliance and planning challenges, requiring taxpayers to monitor many state and federal differences, as illustrated by the following state examples:

• Certain fixed-date conformity states have adopted the TCJA but have not conformed to the OBBBA. As a result, taxpayers in those jurisdictions must continue to compute TCJA-era amounts (such as global intangible low-taxed income [GILTI], foreign-derived intangible income [FDII], Section 174 amortization, and Section 163(j) limitations) even though those calculations no longer are applicable for federal purposes.
• The District of Columbia enacted legislation decoupling from several OBBBA provisions. However, District of Columbia legislation is subject to Congressional review. Congress passed a resolution disapproving the measure, but the District of Columbia could challenge the resolution.
• For Section 174 purposes, Pennsylvania enacted its own version of the OBBBA’s “catch-up” deduction for previously unamortized amounts. Rather than permitting taxpayers to deduct the full amount in 2025 or split the deduction between 2025 and 2026 as provided under the OBBBA, Pennsylvania requires taxpayers to compute the total unamortized balance and amortize that amount ratably over the next five years.
• In a taxpayer-friendly move, the Texas comptroller issued a notice stating that, despite the state’s Jan. 1, 2007, fixed conformity date, Texas will follow bonus depreciation rules under the OBBBA. Additionally, in its 2026 franchise tax report, a taxable entity can include a one-time net depreciation adjustment in cost of goods sold for qualifying assets.
• For Section 174 purposes, Delaware conforms to the immediate expensing treatment of current research and experimental expenses but does not conform to the OBBBA catch-up of prior year unamortized amounts.
• Maryland decouples from the OBBBA in 2025 but will conform (absent subsequent legislation) in 2026.
• Virginia has paused its rolling conformity until 2027, meaning that it will decouple from the OBBBA for 2025 and 2026.

State conformity decisions are shaped not only by tax and fiscal policy, but also by political dynamics. Congress’ decision to overturn the District of Columbia’s decoupling from the OBBBA is a unique example of how decoupling can create a partisan issue and sets the stage for potential litigation and prolonged uncertainty for taxpayers.

In another example, the Arizona governor, who is a Democrat, vetoed Republican-supported state tax legislation that would have conformed broadly to the OBBBA, proposing instead that the state should only adopt certain OBBBA individual tax benefits (such as deductions for tips and overtime) but not conform to the OBBBA’s corporate tax provisions.

Looking ahead

Nearly every state that has addressed the OBBBA has decoupled from some or all of its corporate income tax provisions. For example, Delaware, the District of Columbia, Illinois, Michigan, and Pennsylvania have enacted legislation providing for partial or full decoupling from those provisions.

The trend is not surprising. Faced with a revenue gap they did not create, states must choose between adopting the provisions (potentially requiring politically difficult measures such as raising taxes or cutting services) or decoupling from the IRC, a less visible option from a public policy standpoint. States confronting similar decisions in the coming months are expected to follow this trend, resulting in broader decoupling from OBBBA provisions.

Taxpayers will need to work closely with their state tax advisers to navigate this uniquely unsettled moment.