How the House reconciliation bill may impact state budgets

Bloomberg News

Eliminating the tax exemption. Capping Medicaid funding. Getting rid of FEMA. State lawmakers have heard a lot of proposals from the federal government as they've drafted their 2026 budgets.

When the House GOP passed its version of the Big Beautiful Bill Act, states got a clearer picture of what Washington wants to cut. The costs the bill would pass onto states, some governors say, are "impossible."

2026 was always going to be a difficult budget year. The federal pandemic relief funds that have supported state and local governments for years are running out, and economic growth has slowed. 

Maine had to fix a budget shortfall in its Medicaid program, New Hampshire lawmakers proposed Medicaid cuts and Pennsylvania's governor proposed a budget that would spend billions of dollars from the state's reserves. 

On top of the tighter funds, President Donald Trump has spent budget season slashing federal grants and rocking the financial markets with tariff announcements. 

The bill passed by the House last week would cut roughly $700 billion of Medicaid spending and $300 billion from SNAP, formerly known as food stamps, over the next ten years, CNBC reported. Some Republican senators have indicated that they want fewer cuts, but they'll need to find savings to offset tax cuts elsewhere. 

How the House bill will achieve its savings — and how its strategies will affect states — is complicated. 

What's in the bill

Some of the government's Medicaid cuts won't be passed onto states, but rather eliminate some coverage altogether. The bill includes several policies intended to lower enrollment. Technically, the states would save money from these policies, too, because they wouldn't have to cover these people, according to S&P Global Ratings analyst Geoff Buswick.

But the other components of the bill shift costs to states and create new administrative costs. And, according to healthcare think tank KFF, nearly two-thirds of those costs are targeted at the Affordable Care Act Medicaid expansion that expanded health insurance access in 40 states and the District of Columbia.

For instance, the bill would create a new work requirement for people receiving Medicaid through the expansion and require states to verify Medicaid expansion recipients' eligibility every six months. Currently, states only have to verify eligibility annually.

New York estimated the administrative costs from these policies would be more than half a billion dollars every year. 

The bill also addresses the "provider tax," a small tax states levy on Medicaid providers; in return, states pay the providers higher rates, prompting more matching funds from the federal government. 

Buswick said lawmakers of both parties have discussed cutting or limiting this practice. The bill allows established provider taxes to continue, but prohibits states from raising them or creating new provider taxes in the future. 

Some states would face a special penalty. Only certain immigrants are eligible for Medicaid, but fourteen states offer their own healthcare programs for people regardless of immigration status. The bill would cut the Medicaid expansion funds for those states by 10%. 

All of the policies add up — in New York's estimate, the bill would create around $6 billion of new costs for the state every year. 

The House found one other social program to pare down: the Supplemental Nutrition Assistance Program. 

The reconciliation bill would have states cover at least 5% of the costs for SNAP. This is a new expense that nobody budgeted for, according to Lily Roberts, a managing director at the Center for American Progress. 

"SNAP has always been a program where the benefits are provided at the federal level," Roberts said.

This policy would also introduce a level of uncertainty into state budgets, Roberts said. The need for SNAP benefits increases in economic downturns, and the federal government has the flexibility to handle that demand. States, which must balance their budgets each year, might not. 

The bill would penalize states for administrative errors by increasing a state's share of the costs, Roberts said, which makes the funding more unpredictable. 

These policies could create other expenses for states. 

People who lose their Medicaid coverage would avoid seeking healthcare, which could damage the operations of struggling hospitals, Buswick said. Uninsured people who need emergency medical care would damage hospital finances further. 

Pennsylvania has 25 rural hospitals currently running a deficit, relying significantly on Medicaid, Gov. Josh Shapiro said in a statement. The proposed cuts would put them at risk of closure. 

The bill also cuts infrastructure projects across the country. Those projects were created as an economic stimulus, Roberts said, and losing them would hurt state and local revenues. 

What's happening to the budgets?

When New York passed its budget, Gov. Kathy Hochul said she might reconvene the legislature later in the year to address damage from federal cuts. 

States like New Jersey, Vermont and Connecticut planned to set aside reserves to patch the revenue losses they assumed were coming. 

But under the House version of the reconciliation bill, Buswick said, that probably wouldn't be necessary. 

Many of the new policies don't take effect until 2028. The costs don't get shifted to states until late 2026 — next budget season.

But states will likely want to prepare for the administrative burdens as soon as possible, Buswick said. 

When hiring large groups, Buswick said, governments have to "take time within a budget process to design what you want to deliver, evaluate the technology solutions you have, determine the personnel you may need to get. And then you start to hire."

Besides administrative costs, though, the impacts of the bill would be felt in the longer term, Buswick said. And states might not be willing to bear those impacts, based on their communications with S&P.

"What we're hearing is, when the federal component is going to be cut, they're not expecting to backfill it, period," Buswick said. 

States might try to cover certain cohorts of people who are losing benefits, Buswick said, like pregnant women, children, or the elderly. 

"But they're not going to take everything," he said. 

The bill's Medicaid policies seem to be incentivizing states to drop the expansion. Twelve states have laws which allow them to do just that if the federal government lowers its share of the cost of the program.

For SNAP, the states would be in the same position, Roberts said. Shapiro said Pennsylvania would have $1 billion of SNAP costs every year. 

"Any lawmaker in D.C. who thinks the commonwealth can backfill this massive hole they've created is wrong," Shapiro said. 

Even though states won't cover the costs, Buswick expects them to handle the budgeting challenges competently. Federal Medicaid funding fluctuated significantly as the government coped with the COVID pandemic, and states weathered it well, he said. 

If states respond by dropping the Medicaid expansion, Buswick said, that won't be unprecedented either. The expansion only started in 2014, and some states only joined in the last five years. 

Buswick said he's wondered whether the reconciliation bill would prompt a return to the way states delivered benefits in 2011. 

"If it's that, then we've seen states operate very well," Buswick said.

"They've been able to balance their budgets and deliver the services and have challenges and uncompensated care and dealt with it as best they could," he said.

"There was probably a greater rating volatility as states would be addressing their challenge ways than what we've seen in the past four or five years when there was federal money flowing," Buswick said. "But I don't think that's uncommon. I think it's more common to have rating volatility as states address their needs when there isn't such free flow of federal surplus funds."