Which states have formally decoupled from the federal tip and overtime deductions and what revenue impact did analysts estimate for each?
Executive summary
A small handful of states have already taken explicit positions on whether to “conform” to the federal deductions for qualified tips and qualified overtime introduced in the One Big Beautiful Bill; most states remain undecided and analysts’ revenue estimates vary widely, with one microsimulation putting the cost to eight tip‑conforming states at $336 million in 2026 while state treasuries and reporters offer different, state‑level figures [1] [2]. Reporting shows Illinois and Colorado have taken concrete anti‑conformity steps (in different ways), Michigan has uniquely opted in, and several states have publicly signaled they will not conform even if they have not yet passed formal add‑back statutes [3] [2] [4].
1. Who has formally decoupled or taken a definitive position
Illinois has explicitly said it will require an add‑back for any tip or overtime federal deduction—an unmistakable, formal decision not to conform to the federal change—because state officials concluded they cannot afford the revenue loss [3]. Colorado adopted a hybrid, deliberate approach by decoupling from the federal overtime deduction while allowing the tip deduction, a policy choice presented by Thomson Reuters as a budget‑protecting compromise [3]. Several other states—including Massachusetts, Connecticut, and Hawaii—have publicly indicated they will not conform either by default or through stated policy positions, though Thomson Reuters characterizes some of these as indicated rather than yet finalized statutory actions [3]. Michigan, by contrast, moved the other direction and became the first state to opt into the federal tip and overtime breaks, effective in 2026 [2].
2. Which states would be affected automatically without new state action
Because of how their tax codes “automatically conform” to federal taxable income, a group of states would have seen the federal changes carry over unless they acted to decouple; analysts and state reporting repeatedly identify Colorado, Idaho, Iowa, Montana, North Dakota, Oregon, and South Carolina as states that would be linked to the federal tip deduction absent new legislation [1] [4]. ITEP’s modeling and other commentary note seven states were also currently connected to the overtime deduction, producing immediate budget exposure for states that left conformity in place [1].
3. Estimated revenue impacts — aggregate and state figures
The Institute on Taxation and Economic Policy (ITEP) modeled the effect of linking state codes to the federal tip and overtime deductions and projected that the eight states tied to the tipped‑income deduction would lose about $336 million in state tax revenue in 2026 (this figure comes from ITEP’s microsimulation calibrated to federal Joint Committee on Taxation assumptions) [1]. State‑level estimates vary: ITEP’s published snippets indicate Michigan stood to lose roughly $105 million from a tied tip deduction and about $207 million from the overtime deduction in 2026 under its modeling [1]. By contrast, Michigan’s own treasury projections quoted in Fortune and Idaho Business Review show different numbers—about $45 million for the tips break and nearly $113 million for the overtime exemption in the current budget year—illustrating that official state forecasts and outside microsimulations can diverge materially [2] [4].
4. Why the numbers differ and what remains unresolved
Discrepancies arise because the ITEP microsimulation ages federal estimates to 2026 using projected wage growth and applies state‑specific tax structures, while state treasuries use their own forecasting assumptions and budget calendars, producing different totals [1] [2]. Thomson Reuters notes many states were still “wait‑and‑see” as of late 2025, and that some states that have indicated non‑conformity had not enacted final statutes—so authoritative, comprehensive per‑state revenue tallies are not yet available in the public record [3]. The IRS and Treasury have provided transition and reporting guidance intended to ease the 2025–2026 reporting shift, but that guidance does not settle state conformity decisions, leaving state budget offices and legislatures to weigh competing fiscal and political pressures [5] [6].
5. Bottom line for readers and policymakers
As of the last reporting, only a few states have taken definitive, formal positions: Illinois and Colorado moved to limit the state application of the federal breaks, Michigan explicitly adopted them, and a handful of states have publicly signaled non‑conformity though many decisions remain pending; analysts’ revenue estimates range from state treasury projections to ITEP’s $336 million aggregate figure for the eight tip‑linked states in 2026, and differences in methodology explain much of the variation [3] [2] [1]. If a reader needs a precise, legally binding list of current state statutes and exact fiscal impacts, the available reporting shows those numbers are still in flux and would require checking the latest state legislative dockets or treasury updates because national models and state forecasts do not always align [1] [3].