How much revenue would each state lose if it conformed to the OBBBA tips and overtime deductions?
Executive summary
If every state “conformed” to the OBBBA’s new deductions for qualified tips and qualified overtime, states collectively would lose about $8.6 billion in 2026 alone — a figure calculated by the Institute on Taxation and Economic Policy (ITEP) and widely cited in policy reporting [1]. That headline number masks wide variation: ITEP’s modeling identifies individual-state exposures (for example, Michigan faces triple‑digit millions of dollars of loss) and several states and the District of Columbia have already moved to decouple or limit the damage [1] [2].
1. The math at the national level: billions at risk
Research aggregated by ITEP finds that if all states automatically tied their tax codes to the federal OBBBA rules for tips and overtime, the states would lose about $8.6 billion in fiscal 2026 revenue — a statewide aggregate calculated from a microsimulation model that ages wage data and estimates how the federal deductions interact with each state’s tax base [1]. At the federal level, Congress’s changes are estimated to cut federal revenues by roughly $33 billion annually for the overtime-and-tips provisions, a separate but related estimate cited in the same ITEP briefing [1].
2. Examples that show how concentrated the impact can be
Some states would bear outsized losses: ITEP’s modeling flags a cluster — Idaho, Iowa, Michigan, Montana, North Dakota, Oregon, and South Carolina — that together could lose $648 million in 2026 from these deductions, and it singles out Michigan as facing an estimated $105 million loss from the tip deduction and $207 million from the overtime deduction in 2026 [1]. The District of Columbia’s fiscal office similarly projected multimillion‑dollar impacts and estimated that decoupling from the OBBBA provisions could increase FY2026 revenue by nearly $79–$100 million depending on which items were excluded — D.C. adopted emergency legislation that specifically eliminated the tip and overtime deduction to avert the projected loss [2].
3. Why the per‑state numbers vary so much
Two structural features drive variation: first, the OBBBA’s rules target only “qualified” tip income and FLSA‑covered overtime and cap the deductible overtime amount (the half‑time portion) with an individual cap of $12,500 and $25,000 for joint filers, as explained by multiple legal commentators [3] [4]. Second, state tax codes differ: some states automatically “conform” to the federal code as written, others decouple or enact add‑backs, and a few have historically favored not taxing tips — all of which changes the fiscal arithmetic [5] [1].
4. The policy response: many states will not simply absorb the hit
States have not been passive. Illinois, Massachusetts, Connecticut, Hawaii and others have signaled nonconformity or explicit add‑backs to prevent revenue loss, and Montana welcomed conformity because the fiscal hit was manageable for that state [5]. D.C.’s emergency law specifically eliminated the new deductions for tips and overtime to recover revenue [2]. These moves mean the theoretical $8.6 billion shortfall is an upper‑bound scenario conditional on universal conformity [1] [2].
5. What cannot be answered from available reporting
A precise, line‑by‑line revenue loss for every state under the OBBBA deductions cannot be produced from the cited sources alone: ITEP provides an aggregate and highlights some state figures, and Thomson Reuters and D.C. memoranda note which states intend to decouple, but a complete, source‑verified per‑state table was not included in the documents provided for this analysis [1] [5] [2]. To generate a definitive per‑state loss list requires access to ITEP’s full state breakdown or similar state revenue office estimates.
6. Bottom line — likely outcome and practical implication
If all states mirrored the federal OBBBA deductions, the likely 2026 hit to state coffers is roughly $8.6 billion, concentrated in a handful of states where tipping and overtime income are large relative to the taxable base; however, because many states are already decoupling or planning add‑backs (and D.C. passed emergency legislation to block the deduction), the actual realized loss will be materially lower and unevenly distributed [1] [5] [2]. Policymakers and budget analysts should therefore treat the $8.6 billion as a ceiling scenario and consult state fiscal offices or ITEP’s full report for granular, state‑level estimates [1].