The AI Rules Fight: Who Gets to Set the Law?

What’s Actually Happening with AI Regulation in the U.S.

Right now, there is no single national law governing how companies can use AI. States have been stepping in to fill this gap. California, Colorado, Texas, New York, and others have all passed their own AI rules. This has created what the Trump administration calls “a patchwork of 50 different regulatory regimes” that companies must navigate.

The White House aims to address this issue with one national standard that would override all state laws. A new group called Innovation Council Action—backed by Trump allies and $100 million in funding—is being formed to push this agenda politically.

The core question remains: Should the federal government eliminate state AI laws and replace them with one national rule?

The Case FOR Blocking State Laws (The “One Rule” Side)

Simplicity for Businesses

It’s simpler for businesses to operate under one set of rules. A company using AI-assisted hiring tools in five states must satisfy requirements from California, Colorado, Illinois, New York, and Texas—each with different definitions of prohibited algorithmic discrimination, audit timelines, and disclosure obligations. One national standard would eliminate this maze.

Protecting American Competitiveness

Rep. Kat Cammack argues that startups and growing companies cannot build a compliance framework for 50 different states and survive. Heavy, fragmented regulation could push AI development overseas, harming American innovation.

Not a Total Wipeout

The administration claims this approach wouldn’t completely eliminate state regulations. White House Science Adviser Michael Kratsios stated that states could still regulate child safety and how their own governments use AI—just not commercial AI broadly.

The Case AGAINST Blocking State Laws (The “Let States Decide” Side)

States as Testing Grounds

States have acted as AI policy laboratories, enacting detailed compliance regimes. California’s SB 53 is viewed as a de facto national standard-setter, demonstrating how state laws can shape national norms even without federal legislation. Eliminating them could also erase the best ideas before they can scale.

Lack of a Good Federal Replacement

Democrats and consumer advocates argue that preemption without a meaningful federal framework leaves people without protections. This concern led to the Senate voting 99-1 to strip a 10-year moratorium on state AI laws from a major spending bill.

Trust is Already Broken

A February YouGov poll found that 63 percent of Americans believe AI will lead to fewer jobs. Removing state-level consumer protections in this climate is politically risky. Critics argue it signals that the government is siding with tech companies over workers and communities.

Big Money, Narrow Interests

A March 2026 New York Times article notes that Innovation Council Action is organized as a “dark money” nonprofit, meaning it doesn’t have to disclose its donors. Critics see a $100 million push by an industry-aligned group to eliminate consumer protections as a significant conflict of interest.

What This Means for Small Businesses and Nonprofits

This debate is more complicated than the headlines suggest.

If Federal Preemption Passes (State Laws Blocked)

• Small businesses operating in multiple states would face less compliance paperwork. Currently, a small HR software company or nonprofit hiring platform may need to comply with different AI rules in every state where they operate.

• However, without strong federal protections, small businesses and nonprofits that use AI tools (not build them) would lose the consumer and worker safeguards enacted by states. If an AI hiring tool discriminates or an AI-generated donor communication misleads, there may be fewer legal remedies available.

  
  

• Regardless of how the federal-state debate resolves, companies deploying AI in consumer-facing or employment contexts must build documentation, impact assessments, and governance infrastructure now. Small organizations that haven’t started this work are already behind.

  
  

If State Laws Remain

• Compliance complexity remains high. A small nonprofit operating across state lines must track multiple sets of rules, which is a real burden for limited staff and no legal department.

  
  

• However, consumer and worker protections will remain stronger, allowing states to continue experimenting to find what actually works.

  
  

The bottom line for small organizations is clear: The current debate is primarily driven by large tech companies seeking fewer rules. Small businesses and nonprofits are not adequately represented in this discussion. Whatever legislation passes is likely to reflect the interests of those funding the advocacy. Notably, Innovation Council Action’s donor list is deliberately hidden from public view.

The Bigger Picture

The concept of widespread preemption of state AI laws has faced strong bipartisan pushback. There are no public indications that state governors and lawmakers will easily cede their ground. This fight is far from over, and the 2026 midterm elections are amplifying the debate. The money flowing in—from all sides—suggests this will be one of the defining policy debates of the next few years.

In this evolving landscape, small to mid-sized nonprofits must stay informed and engaged. As we navigate these changes, it's crucial to ensure that our core values remain intact while leveraging technology to amplify our impact. By adopting AI responsibly, we can reduce administrative burdens and focus on what truly matters: serving our communities.

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For more insights on how to safely and responsibly adopt AI, check out AI For Nonprofits.