Trump's AI Order Ignites Federal-State Regulatory Battle

President Donald Trump is preparing to issue an executive order as early as Friday that would assert federal control over artificial intelligence regulation, blocking states from enacting their own AI laws, according to multiple sources and a leaked draft obtained by POLITICO. The move, part of a broader effort to prevent a "patchwork" of conflicting state regulations, aligns with growing industry and Republican concerns that decentralized oversight could stifle innovation. The draft order, confirmed authentic by three individuals familiar with the matter, would establish an "AI Litigation Task Force" under the Department of Justice to challenge state laws on constitutional grounds, including claims they improperly regulate interstate commerce according to the draft.

The executive order reflects a contentious national debate over who should govern AI policy. Industry leaders and Republican lawmakers argue that state-level regulations risk creating a fragmented landscape, complicating compliance for tech firms. This follows a failed congressional attempt this summer to block state AI laws via the GOP's "One Big Beautiful Bill Act," and recent efforts to include a moratorium in the year-end defense bill. Trump has publicly endorsed the push, warning on Truth Social that allowing states to regulate AI would lead to "woke" models and a "disaster" for the industry according to public statements.

The order's draft outlines aggressive measures to preempt state laws. It would direct the Commerce Department to review "onerous" state AI regulations within 90 days and restrict federal broadband funds to states whose laws are deemed problematic. The Federal Trade Commission would also investigate whether state rules requiring alterations to AI outputs violate existing statutes. Meanwhile, the Federal Communications Commission and special adviser David Sacks would explore adopting a federal AI disclosure standard to preempt state-level mandates according to draft details.

Market reactions to the potential shift in regulatory focus have been mixed. C3.ai, a key player in enterprise AI, saw its shares rise 8.2% on Monday amid broader tech sector optimism, despite a 27.7% decline over the preceding three months due to weak financial performance and leadership challenges according to market data. Conversely, the COAI Index-a benchmark for AI and crypto AI stocks-plunged 88% year-to-date in November 2025, partly due to regulatory uncertainty and C3.ai's struggles according to analysis. Analysts argue the COAI selloff represents an overreaction, noting C3.ai's Q1 2025 revenue rose 21% to $87.2 million, with 84% of income from recurring subscriptions according to financial reports.

Critics of the draft order question its legal viability. Mackenzie Arnold of LawAI warned that states retain authority to regulate technology within their borders, and many existing laws likely comply with federal commerce clauses according to legal analysis. California's Scott Wiener, author of a state AI safety law referenced in the draft, dismissed Trump's authority, stating, "He has no power to issue a royal edict canceling state laws" according to public statements.

The executive order, if finalized, would mark a significant escalation in the federal-state regulatory tug-of-war. For now, the White House has declined to confirm the plan, calling discussions "speculation" until an official announcement according to White House statements.

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