Virginians could save $1.4 billion by complying with Trump’s tax law

By Steve Haner

Virginia businesses and families could save up to $1.4 billion per year if the 2026 Virginia General Assembly decides to align state tax laws with the new federal tax rules. This is a new estimate by the Tax Foundation. They looked at the effect of full compliance in all 50 States.

Jared Walczak, vice president of State Projects at the Tax Foundation, is well-known and respected in Richmond. He was a legislative assistant with a keen interest on tax issues. The Tax Foundation Report is a good place to start a debate. His team’s estimations are only that.

The time to ask candidates for the General Assembly and the Governor about these issues, is before the November elections. It is important to bring up the recent good news that the state has finished another budget cycle with a healthy surplus. Outgoing Governor Glenn Youngkin can propose these provisions in his budget for December.

Virginia has always taken the position that it will conform to federal rules and definitions when it comes to income tax. Conformity is the ideal because it simplifies compliance with tax laws. Virginia has not been a “rolling conformity” or automatic state for more than 10 years. The list of variations is very long, and it may grow even more.

The 2025 General Assembly, anticipating big changes under the new president Donald Trump, inserted in the budget a commandment that made it clear no changes to federal law adopted by Congress will be automatically adopted in Virginia. This includes changes with minimal fiscal implications.

The Tax Foundation reviews other state’s positions and labels our position “static conformity”. The next governor and legislators in 2026 will have a lot of decisions to take, including some on federal provisions that are highly popular such as the individual deductions for tips and overtime.

Tax Foundation tries to estimate how much state income tax would be saved if these deductions were also available on state tax returns. The $1.4 billion is roughly evenly split between individual provisions and new or expanded business deductions.

Trump had promised during his campaign that the One Big Beautiful Bill Act would create a new federal deduction for tips income. The deduction is available for tip income up to $25,000. Taxpayers don’t have to itemize deductions in order to take advantage of this deduction. This change will be effective with the current tax year. Tax Foundation estimates the same rule applied to Virginia’s tax revenues would result in a reduction of $67.3 million. The new deduction will expire after 2028.

Trump also promised to end taxation on the first $12,500 in overtime wages. This will have a more widespread effect and Virginia workers could save an estimated $324,000,000 on state taxes by 2025. The federal deduction will be available to those who choose the federal standard deduction. However, it is up to the General Assembly whether or not Virginia follows suit.

Both itemizers and standard deductibles can benefit from the new auto loan interests deduction. The deduction is phased out as income increases. If Virginia allowed it, taxpayers could save more than $88 million. The pressure for Virginia to adopt this could be high, as tariffs are increasing car prices.

OBBBA failed to keep a Trump promise, which was the elimination of federal taxes on Social Security Income. Virginia was not affected by the proposal because Virginia exempts Social Security from tax. Instead of eliminating the tax altogether, Congress has created a higher standard deduction to benefit older taxpayers. The new deduction, which is $6,000 for each person or $12,000 per couple, is also phased out as income increases.

Virginia could adopt this, but there may be less pressure because Social Security benefits are already tax-free. Tax Foundation scored this provision as the most beneficial to Virginia. Virginia taxpayers would save almost $230,000,000. The voters’ pressure will decide its fate, just as it did with the other 3.

The Tax Foundation has provided estimates for four of the OBBBA’s individual provisions. The full report includes several other provisions.

A specific provision of OBBBA, which was closely followed, changed the amount that could be deducted from federal income tax from state-local taxes (SALTs) to $40,000. State law does not place a cap on itemizing at the state-level. The new federal cap could cause Virginians who itemize to go back to that practice. In the event that a large number of tax returns are filed in this manner, it will result in a loss to state revenue. The Tax Foundation did not make any estimate on this issue.

Tax Foundation looked at the impact of Virginia adopting four changes to depreciation or deductions made by OBBBA on business income taxes. The focus will likely be on business lobbyists and the public is unlikely to pay much attention. They are still important because they will be adopted by many other states and used to recruit employers.

The provision that has the greatest impact on the state is the SS168(k), full expensing rule. This allows businesses to immediately write off their investments and not over a period of time. Virginia previously rejected this provision, so Virginia’s acceptance would represent a significant policy shift. Tax Foundation estimates that it would be a significant business tax reduction of $397 million. This is the largest among the four Tax Foundations discussed.

Two of the changes are Virginia’s, which Virginia must now amend in order to remain compliant, and a third is a new deduction.

• The recent move to amortize research and experimental expenses under 174 has been reversed. This allows for immediate cost recovery of research and development. According to the Tax Foundation, conforming to these rules would result in a loss of tax revenue of $254 million.
• The new SS168(n), provides for the first-year depreciation of qualified production properties (e.g. factories). Tax Foundation estimates this to be $39 million. This is low for a state that has so much construction activity.
• Tax Foundation estimates that the cap on SS 179 deductions for small businesses will increase from $1 million up to $2.5 millions, which is a $21-million tax break.

The OBBBA has a distinct difference from the 2017 Tax Cuts and Jobs Act. The TCJA introduced several federal tax changes that could have resulted in a windfall of new state tax revenues, money which the state would be able to reap simply by doing nothing. OBBBA wasn’t that type of tax reform. It didn’t have major provisions to eliminate deductions or raise funds to balance out the many reductions.

The Thomas Jefferson Institute for Public Policy published the first edition of HTML0 this morning.