Conforming to Trump’s Tax Bill Would Save Virginians $1.4 Billion More

Should the 2026 Virginia General Assembly choose to conform state tax laws to the full set of new tax rules at the federal level, Virginia families and businesses might save as much at $1.4 billion annually.  That is a fresh estimate from the Tax Foundation, which looked at the impact of full conformity in all 50 states. 

Jared Walczak is vice president of state projects at the Tax Foundation and is well known and respected in Richmond, where he worked as a legislative aide with a keen interest in tax matters.  His team’s estimates are just that, and the Virginia Department of Taxation may be coming up with different numbers, but the Tax Foundation report can start the debate.  

They might prefer we didn’t, but the time to press candidates for governor and for the General Assembly about these issues is now, before the November election.  The recent good news about the state finishing yet another budget cycle with a healthy surplus should be part of the conversation.  In his introduced budget in December, outgoing Governor Glenn Youngkin could propose which of these provisions he would adopt.  

Virginia’s default position on the income tax for years has been to conform to federal tax rules and definitions. Generally, conformity should be the goal because of how it simplifies tax compliance.  But it has been more than a decade since Virginia was an automatic or “rolling” conformity state.  The list of variances has gotten very long and may now grow again. 

Anticipating big changes under new President Donald Trump, the 2025 General Assembly inserted a firm commandment in the final budget making it clear that no federal changes adopted by Congress would be automatically adopted in Virginia, even those with minimal fiscal implications.  

The Tax Foundation labels our current position as “static conformity” and also reviews the other states’ postures. That will leave the next governor and the 2026 legislators with a long list of decisions to make, some of them on highly popular federal provisions such as the new individual deductions for tip income and overtime income.  

Tax Foundation takes a stab at providing a “score” on each of them, an estimate on how much income tax the state would forego if the deductions also applied on state tax returns.  The $1.4 billion total is about evenly divided between the individual provisions and various new or expanded business deduction. 

As Trump promised in his campaign, the One Big Beautiful Bill Act (OBBBA) did create a new federal tax deduction for tip income.  Taxpayers do not have to elect itemized deductions to claim the deduction for up to $25,000 in tip income, and the change starts with this current tax year.   The Tax Foundation estimates that the same rule adopted for Virginia’s taxes would reduce state income tax revenue by $67.3 million.  The new deduction expires after 2028.

Another Trump promise was ending tax on the first $12,500 of overtime pay, and that will have more widespread impact and could save Virginia’s workers an estimated $324 million on state taxes for 2025.  Again, the federal deduction is allowed for those who take the federal standard deduction, but if and how Virginia would do it rests with the General Assembly.  

The OBBBA’s new deduction for auto loan interest also works for both itemizers and those taking the standard deduction. It does phase out at higher incomes.  Should Virginia allow it for those taking the state standard deduction, the savings to taxpayers would exceed $88 million.  With tariffs raising car prices, the pressure to adopt this in Virginia could be strong. 

One Trump promise not kept by OBBBA was to eliminate the federal tax on Social Security income.  As proposed, that had no Virginia impact because Virginia already exempts Social Security benefits from tax.  But instead of eliminating the tax, Congress created a new, higher standard deduction for older taxpayers.  Again, there is a phase out with higher incomes, but the new extra deduction is $6,000 per person or $12,000 for a couple and the provision expires after 2028. 

That is something Virginia could also adopt, although there might be less pressure to do so because Social Security is already tax free.  Of the four individual provisions scored by the Tax Foundation, it would have the largest impact on Virginia, saving taxpayers almost $230 million.   As with the other three, pressure from the voters will determine its fate. 

Those are not all the individual provisions in the OBBBA, just the four for which the Tax Foundation provided state-level estimates.  Its full report mentions several more. 

One individual provision in OBBBA that was followed closely changed the amount of state and local tax (SALT) that can be deducted at the federal level from $10,000 to $40,000.  State law which places no such cap on those who itemize at the state level. But the new higher federal cap may cause many Virginians to return to the practice of using the itemized deduction tax method.  If a high enough number of returns do so, that will cause a state tax revenue loss.   The Tax Foundation made no estimate regarding that issue.

On business income taxes, the Tax Foundation also looked at four of the many deductions or depreciation changes made by the OBBBA and their potential impact if Virginia conforms to them.  These will be the focus of business lobbyists, probably with little attention paid by the public.  That doesn’t mean they are not important, because many other states will adopt them and use them in recruiting employers.  

The provision with the largest state impact is the expanded § 168(k) full expensing rule, which allows businesses to write off investments immediately and not over time. It is something Virginia has previously rejected, and it would be a major policy change for Virginia to accept it.  It would also prove a major business tax cut, estimated by the Tax Foundation at $397 million, the largest of the four Tax Foundation discussed.  

The other three changes to business tax provisions include two which Virginia have adopted, but which it now must amend to stay in conformity, and one new deduction:  

• The recent shift to amortizing research and experimental expenditures under § 174 is reversed, restoring immediate cost recovery for research and development costs.  The Tax Foundation believes conforming to this would reduce tax revenue $254 million.
• A new § 168(n) is created, providing first-year expensing for qualified production property (e.g., factories).  The Tax Foundation scores this at $39 million, which appears low in a state with this much construction activity. 
• The cap on the § 179 expensing deduction for small businesses rises from $1 million to $2.5 million, which Tax Foundation sees as a $21 million tax break for those firms in this state.

There is one glaring difference in the aftermath of the OBBBA when compared to the similar 2017 Tax Cuts and Jobs Act.  The TCJA made several federal tax changes, which produced a potential windfall in new state tax revenue, money the state could reap by simply doing nothing.  OBBBA was not that kind of tax reform, with no major provisions that eliminated deductions or raised funds to balance the many reductions.  

Steve Haner is a Senior Fellow with the Thomas Jefferson Institute for Public Policy. He can be reached at Steve@thomasjeffersoninst.org.