— State and local officials across the United States have moved to keep parts of the Republican tax package passed in July 2025 out of their tax codes, creating a political clash with congressional Republicans. Colorado, Delaware and the District of Columbia are among jurisdictions that have barred new federal deductions — from overtime pay carve-outs to certain business breaks — from reducing state taxable income. Lawmakers and city officials say the changes protect state revenues and prevent last-minute disruption to filing season; congressional Republicans argue the measures deny residents federal tax relief. The standoff escalated this week when the Senate advanced a resolution forcing D.C. to conform to the federal law, setting up a likely presidential signature.
Key Takeaways
- Congress enacted a broad Republican tax package in July 2025 that revived or created several tax breaks for individuals and businesses, including non-taxation of certain tips and overtime-related deductions.
- Many states begin their income-tax calculations from federal definitions; when federal law lowers taxable income, those states can lose revenue unless they decouple.
- Colorado preemptively excluded a new federal overtime deduction from its state code before the federal law took effect, aiming to protect state receipts.
- Delaware moved in 2025 to prevent new federal business tax breaks from reducing its taxable base, citing budgetary impact concerns.
- The D.C. Council voted to omit several federal cuts from the district code; on Feb. 12, 2026, the Senate passed a resolution to force D.C. to adopt the federal changes.
- Local officials warned sudden federal forcing of conformity would disrupt filing season and impose administrative burden during tax season in the capital.
- Republican leaders view the federal tax changes as a potential political boon — a predicted refund surge they say could aid their candidates — but evidence of an electoral payoff remains speculative.
Background
For decades, most U.S. states have used federal definitions of income — such as adjusted gross income or taxable income — as the starting point for state income-tax calculations. This conformity simplifies compliance for taxpayers and reduces state administration costs, but it ties state revenue to decisions made in Washington. When Congress expands deductions or narrows taxable income, states that automatically follow federal rules can see immediate declines in taxable bases and thus in revenue collections.
In recent years, states have routinely considered targeted decoupling measures to blunt specific federal changes that would materially affect budgets. Those choices are often technical and executed quietly in state tax bills, but the scope and timing of the Republican package enacted in July 2025 — which included high-profile provisions such as a tip and overtime exemption — made the effects more visible and politically charged. Fiscal offices in state governments run projections to estimate the revenue impact; when potential losses are significant, lawmakers face pressure to act.
Main Event
Colorado’s legislature moved early to ensure that a federal deduction for overtime pay created in the 2025 federal law would not reduce Colorado taxable income. State fiscal officials warned that allowing the federal deduction to carry through would lower state receipts and complicate forecasting. Delaware passed a measure in 2025 aimed at preventing new federal business tax breaks from shrinking the state’s taxable base, citing the need to preserve revenue for core services.
In the District of Columbia, the D.C. Council voted to exclude a set of the federal tax cuts from the district code, saying the change would prevent administrative chaos and protect local finances. Mayor Muriel E. Bowser and D.C. officials told congressional colleagues that a sudden, forced change to the city’s tax treatment would disrupt the current filing season and impose operational burdens on the Office of Tax and Revenue.
“A sudden change to the city’s tax code would upend filing season in the capital,”
Mayor Muriel E. Bowser
Republican members of Congress pushed back. On Feb. 12, 2026, the Senate advanced a resolution requiring the District to conform to the federal law; the House already passed an identical measure and the bill was headed to the president. Representative Brandon Gill of Texas, the House sponsor of the D.C. legislation, said the D.C. Council’s decision was politically motivated and that residents should receive the same tax relief granted by Congress.
“The D.C. council would rather punish their own residents, their own people, than recognize the achievements of President Trump’s legislation,”
Representative Brandon Gill
Analysis & Implications
At its core, the dispute is a policy-and-politics collision: technical tax conformity rules have become a vehicle for partisan messaging. For states, the practical calculation is straightforward — a federal deduction that reduces taxable income reduces state revenue unless the state enacts a statute to decouple. That creates budgetary pressures, especially for states with narrow reserves or near-term spending commitments.
For the federal government and Republicans promoting the tax changes, the immediate concern is visibility and voter perception. Party strategists argue that larger refunds or lower withholding tied to the federal law will be tangible benefits voters notice in the months after enactment. But whether those effects translate into durable electoral gains is uncertain; voter response depends on speed, scale and public understanding of the changes.
The D.C. episode also raises questions about congressional authority over the District. Historically, Congress has used legislative vehicles to influence D.C.’s policies, but forcing conformity on a tax filing cycle during a live season risks administrative disruption and potential legal challenges. Municipal officials warn that last-minute changes to withholding tables, forms and processing systems could slow returns and complicate tax assistance for low-income residents.
Comparison & Data
| Jurisdiction | Action | Primary Rationale |
|---|---|---|
| Colorado | Excluded new federal overtime deduction | Protect state revenue and forecasting accuracy |
| Delaware | Blocked certain federal business breaks | Preserve tax base for budget stability |
| District of Columbia | Voted to omit several federal cuts; faced congressional resolution | Avoid filing-season disruption and administrative burden |
The table highlights examples of proactive decoupling rather than an exhaustive list. State fiscal offices typically model the revenue effects before adopting changes; the magnitude of the impact depends on the specific deduction, the number of taxpayers affected and each state’s reliance on income tax receipts.
Reactions & Quotes
Local government and tax administrators emphasize operational risk and budget impact as their core concerns. D.C. officials argued that implementing federal changes mid-season could force agencies to reprogram systems, revise withholding guidance and retrain staff — all while processing millions of returns. Congressional Republicans framed the state and district measures as politically motivated refusals to pass along federal tax relief to residents.
Outside experts note the tension between administrative simplicity and fiscal prudence. States that conform automatically reduce taxpayer paperwork, but they also cede control over the size of their tax bases to federal lawmakers. Policymakers must weigh the short-term benefits to taxpayers against the longer-term obligation to fund services.
Unconfirmed
- Whether the predicted “refund boom” from the federal tax changes will materially boost Republican electoral prospects remains speculative and lacks conclusive empirical evidence.
- Comprehensive, up-to-date counts of how many states will fully or partially decouple from the July 2025 federal package have not yet been published; some legislatures are still considering measures.
Bottom Line
The clash over the July 2025 federal tax changes exposes the friction between federal policymaking and state budgeting choices. Technical rules about how taxable income is calculated have real consequences for state revenues, agency workloads and taxpayer experience, and those consequences are now being litigated in the political arena as well as in state legislatures.
Expect more states to weigh targeted decoupling where projected revenue losses are meaningful, and anticipate continued partisan debate as Republicans press to show the federal law’s benefits. Policymakers and tax administrators will need to balance the political incentives for rapid conformity against the operational and fiscal costs of doing so mid-filing season.
Sources
- The New York Times — news/press (reporting on state responses to July 2025 federal tax legislation)