The ripple effects that the One Big Beautiful Bill Act will have on state and local taxes are going to be impactful, showing the need for guidance.
Key findings:
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State-level changes — States are responding to the impact of OBBBA on state-level taxation.
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Budget shortfalls may result — Several states are already projecting reduced revenue collections because of the OBBBA.
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Multi-state business impacts — Businesses with multi-state operations should re-evaluate where their operations are located for tax purposes.
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The One Big Beautiful Bill Act (OBBBA) ushered in sweeping federal tax changes including provisions aimed at stimulating domestic business investment, particularly in manufacturing and research & development. While many businesses welcome the enhanced federal deductions, the changes are also significantly shifting the landscape for taxation at the state and local levels.
The impacts of the OBBBA are playing out differently across states, depending on each state’s own tax rules. In addition, the Act is likely to have fiscal ripple effects for states, including new budget challenges. How states respond to these combined impacts promises to dramatically reshape the tax environment, particularly for businesses operating across multiple jurisdictions.
These are among the considerations that seem to be keeping clients up at night — despite the federal tax benefits of the Act, many business owners and tax professionals are nervous about what it’s going to be mean at the state and local levels.
Impact on state-level tax policies
For businesses that operate across multiple states, the state and local tax landscape is suddenly more dynamic and much less predictable. States generally start their income tax calculations based upon federal taxable income, but they then modify those numbers based on their own rules and legislative priorities. That means federal changes, such as bonus depreciation or research expensing, are often partially or fully clawed back at the state level. So key provisions of the OBBBA, particularly those involving deductions and R&D expenses, will impact specific businesses differently depending on a state’s existing tax rules and policies.
For example, the OBBBA allows immediate 100% expensing for federal purposes for fixed assets placed in service after January 19, 2025. However, many states already decouple their assessments from federal bonus depreciation. Other states adjust the percentage or disallow the bonus entirely, forcing an addback and requiring businesses to instead use standard federal depreciation schedules. In fact, OBBBA threatens to widen these differences for deductions.
The impacts of the OBBBA are playing out differently across states, depending on each state’s own tax rules.
Similarly, the OBBBA enhances the ability of businesses to expense qualifying domestic R&D costs. Historically, only a few states followed the federal shift from expensing to capitalization under prior law. Some states, such as Indiana, may now conceivably permit a double deduction for these expenses under concurrent federal and state codes. Meanwhile, other states will likely reassess or restrict the treatment of these deductions because of concerns over the potential negative impact on state revenues.
Michigan and Rhode Island, for example, recently enacted legislation decoupling from the OBBBA provision that allows for the immediate deduction of domestic research and development expenses, resulting in the continued requirement to capitalize such amounts for state purposes.
State budget concerns
Meanwhile, concerns about the effect of the Act on state revenues could result in far more significant impacts.
One of the most immediate consequences of the OBBBA has been already observed in several states: Illinois, Maryland, Nebraska, and Oregon are among the states that have publicly acknowledged that major federal funding cuts in programs like Medicare, Medicaid, SNAP food assistance, and broader social services are likely to trigger budget shortfalls. And Colorado recently announced a projected $1 billion shortfall, prompting tax increases and a November 2026 referendum to raise income tax rates on certain high-income levels.
While clearly, nobody has a crystal ball, the OBBBA is already putting a lot of strain on state budgets and more states will likely follow in Colorado’s footsteps. Indeed, at a Massachusetts Department of Revenue roundtable held September 30, Commissioner Geoffrey E. Snyder declared that the OBBBA is projected to reduce the state’s revenue collections by almost $700 million in their 2026 fiscal year.
Impact on businesses
For businesses, navigating through all these changes complicates everything from daily operations to long-term strategy planning — and the stakes are considerable.
New tax increases or other changes in state tax rules could change asset deployment strategies, shift business expansion plans, and even encourage relocation to more favorable jurisdictions. Robust proactive tax planning is now a competitive necessity rather than a defensive maneuver.
To get on top of this, tax professionals should look into adopting more customized, multi-state mindsets for their clients. It’s essential that tax professionals fully grasp the substance and trajectory of each material state, or those states in which their clients’ businesses have significant business activity. Given that most states currently apportion taxable income primarily based on revenue, rather than physical presence, the rules governing each material state should be monitored closely in addition to the state in which the client is headquartered.
To get on top of this, tax professionals should look into adopting more customized, multi-state mindsets for their clients.
Further complicating matters is that the ripple effects from state responses will vary considerably in terms of timing. Some state legislatures only meet biennially, while some states may call special sessions to address urgent revenue needs or adjust their rules to conform with federal law. States also may enact rapid changes in response to headline-making budget projections — often with little warning.
Tax professionals need to stay proactive and vigilant, and most importantly, keep their finger on the pulse of state tax policies to best keep their clients informed. Some key steps for tax professionals include:
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- Conduct a “material state” audit — Proactively identify and monitor those states in which clients have meaningful revenue, as those locations will now drive new tax risks and opportunities.
- Stay informed on legislative developments — Closely track statements from state governments, economic development departments, and relevant tax and economic authorities on budget forecasts and discussion of anticipated responses.
- Educate and advise clients with flexibility and understanding — Provide clients with regular updates on state-level changes and counsel them to build flexibility into their business forecasts and strategies, especially around capital expenditures and R&D investments.
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While the OBBBA is ultimately a federal catalyst — the state and local reverberations of the Act are just beginning to be felt. For tax professionals, this is a moment to lead by educating clients, anticipating legislative shifts, and building resilient tax strategies across jurisdictions. State and local responses to the OBBBA will be diverse and are only beginning to unfold. Steady guidance from tax professionals can make the difference between whether their clients thrive or flounder amid all these changes.
You can find more of our coverage of the One Big Beautiful Bill Act here
