As federal changes under the One Big Beautiful Bill Act (OBBBA) ripple through the tax landscape, state and local tax (SALT) planning has become increasingly complex. From evolving conformity decisions and property tax reforms to renewed debates over the SALT deduction and pass-through entity taxes (PTETs), businesses and individuals alike should take stock of how their state-level obligations are shifting. Here’s what taxpayers should know and how to prepare for the year ahead.
State Budgets and Conformity in Flux
Most states enter 2026 with healthy rainy-day funds, but slower growth and lower revenues are on the horizon. States including Illinois, Maryland, New York, Pennsylvania, Colorado and Washington are already facing significant budget challenges. In response, many states are looking to broaden their tax base rather than enact politically unpopular tax rate increases.
One major way states plan to increase their respective tax bases is to delay or decouple from many of the OBBBA provisions. Twenty-four states automatically conform to the currently enacted Internal Revenue Code (IRC), although many have state specific modifications that will disallow many of the beneficial OBBBA provisions. The remaining states have fixed date conformity, which requires the state legislation to change the date of conformity. Many states are expected to update their conformity dates, but the timing is not clear. Notably, California recently updated its IRC conformity to January 1, 2025, which ironically does not include the OBBBA provisions.
Planning tip: Don’t assume automatic conformity. Model year-end provisions state by state, especially for depreciation, R&E and interest expense deductions.
Expanding the Tax Base: Incentives and Enforcement
States are approaching revenue generation with both a “carrot” and a “stick”:
- Incentives (the carrot): Some states, like New Jersey, have rolled out large credit packages for manufacturing and job creation. Others, including Oregon, New York and Maine, are fast-tracking renewable energy permits to allow companies to make large capital investments in their states before key federal deadlines.
- Enforcement (the stick): The Multistate Tax Commission (MTC) recently broadened its interpretation of “doing business” to include remote internet-based activities like warranty support, job postings and cookie-based analytics. This reinterpretation, adopted in states like New Jersey, New York and Massachusetts, erodes federal protections under Public Law 86-272 for companies selling tangible goods online.
Planning tip: Evaluate where your business may have created nexus under new MTC guidance and confirm filing positions and/or potential exposures.
Pass-Through Entity Taxes and the SALT Cap
The SALT deduction cap was expanded under OBBBA to $40,000 in 2025 before phasing back down. This has renewed attention on PTET elections as a planning tool. The PTET allows pass-through businesses to pay state income taxes at the entity level, shifting deductions from individual owners to the entity, effectively allowing state tax deductions that would have been limited.
While PTETs can reduce federal taxable income, they also create complexity:
- Election timing varies. For example, New York and New Jersey require elections within 2.5 months of the tax year start, while California requires an estimated payment midyear.
- State treatment of PTET credits for residents differs, potentially creating double taxation.
- Graduated tax rates may make PTET elections less beneficial for some owners.
Planning tip: Review PTET deadlines and model both entity-level and individual outcomes before making elections or estimated payments.
