Senate Clears the Way for State AI Regulation. Meta, Amazon, and Alphabet Stock Fall.

Texas Sen. Ted Cruz led efforts to ban states from regulating AI, but ultimately ended up voting against the moratorium. (Al Drago/Getty Images)

The Senate broadly rejected a provision in President Donald Trump’s megabill that would have limited states’ ability to regulate artificial intelligence, delivering a crushing blow to Meta Platforms and Microsoft.

The moratorium on AI regulation in the Republican tax-and-spending bill would have banned states from enforcing limits on the technology for at least five years—and would have blocked federal funding from those that did, with some exceptions. But the Senate voted overwhelmingly to strike it from the legislation on Tuesday, in a vote of 99-1. Only Republican Sen. Thom Tillis (Fla.) voted to keep the provision.

Trump’s megabill narrowly passed the Senate Tuesday and now heads to the House. Meanwhile, the provision’s defeat paves the way for states to oversee AI as they see fit. California, Colorado, and Utah have already passed laws that serve as an indicator of things to come, namely tighter regulation at the state level.

A California law that went into effect this year established a definition for artificial intelligence as a jumping-off point for a consistent legal framework. Another piece of legislation, AB 2013, is set to go into effect in 2026, requiring companies to share documentation on the data used train AI models.

With the proposed moratorium dead and buried, investors may wonder what it means for the AI stocks in their portfolio. Strict regulations at the state level could have implications for the sector, particularly major players like Microsoft, Alphabet, and Meta.

Meta fell 2.5%, and Alphabet and Microsoft each declined 0.8% after Tuesday’s Senate vote.

While the regulatory landscape is still taking shape, all signs point to state legislators taking steps to limit the reach of AI. The megabill’s ill-fated AI provision came under fire on both sides of the aisle after Republican Sen. Ted Cruz (Texas), who heads the Senate Commerce committee, floated it in May.

Last month, more than 260 legislators from all 50 states sent a letter to Congress to voice their concern about the moratorium. Officials argued the provision hindered their ability to protect residents from the possible harmful effects of AI, such as malicious deepfakes and job displacement.

Proponents of the provision, however, said that inconsistency among state and local laws was preventing the U.S. from developing a competitive edge over China in the AI race.

The moratorium was originally proposed as a 10-year ban, but Cruz struck a deal with Republican Sen. Marsha Blackburn (Tenn.) to cut the time frame in half on Sunday. That compromise ultimately fell apart, with Blackburn pulling her support a day later and Cruz himself voting to get rid of the provision.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com