The Trump administration's newly enacted tax law lays out an uncertain future for states that rely on federal funding to support Medicaid payments and tax revenue to keep their budgets in balance.
"In the short term states will likely see some shifts in revenues due to changes in standard deductions, SALT cap increase, expensing rules, and exemptions," said Lucy Dadayan, principal research associate with at the Tax Policy Center, Urban Institute & Brookings Institution.
"In the long run, states will see structural budget pressures as reductions in federal funding for safety net programs could strain state budgets, especially in states with higher poverty rates and greater reliance on Medicaid and SNAP."
The Tax Policy Center estimates that state and local governments have over $4 trillion in outstanding municipal bond debt with the states accounting for about 40%.
Every state except Vermont is required by law to operate from a balanced budget. According to the National Association of State Budget Officers as of July 4, forty-four states have already enacted their 2026 fiscal year budgets.
"As states enter fiscal 2026, they are contending with a combination of increasing spending demands, slowing revenue growth, and federal fiscal uncertainty," said Brian Sigritz, Director of State Fiscal Studies for NASBO.
"They are facing budget pressures in a number of areas such as Medicaid, employee health care, education, housing affordability, and disaster preparation and response."
A survey of Governors conducted by NASBO earlier this year shows the state's chief executives recommending, "holding general fund spending flat in fiscal 2026."
According to a State Health and Value Strategies program report, states can expect to lose 3%-18% of their federal Medicaid funding over 10 years under the law with Arizona, Kentucky and Virginia taking the biggest hits.
In May, Colorado's Democratic Governor Jared Polis confirmed that he may call a special legislative session by the end of the year to deal with Medicaid cuts.
Democrat Gov. JB Pritzker, of Illinois is also considering a legislative do-over while the Democratic governors of Arizona and Kansas are both attacking the new bill.
Pennsylvania, Indiana, Oklahoma, and Texas are all working on plans to shore up state support for rural hospitals, an especially
The One Big Beautiful Bill intends to save $317 billion by adding work requirements for Medicaid eligibility.
"States need time to react and respond. In addition to updating systems for work requirements, they'll need to design program cuts and enact revenue increases, and/or eliminate or scale back other one-time services," said Shelby Kerns, Executive Director for NASBO.
"Rainy day funds are not a solution to ongoing cost shifts."
How the new costs, adjusted revenues, and fat reserve funds play out remains to be seen.
"States have experienced robust growth in tax revenues in recent years, with revenues up nearly 20% percent since the start of the pandemic," said Jared Walczak, VP of state projects for the Tax Foundation.
"While the higher costs under the OBBB are meaningful and states will have to plan for them, they are only a small fraction of states' recent revenue growth."
The size and scope of the nearly 1,000-page law promises a complex implementation.
"When you look at the net tax cuts of $4.5 trillion, and you dig into that, you'll see that there's actually $12.5 trillion of tax provisions," said Jeff Paravano, a former Treasury official and now partner at BakerHostetler.
"There's never been a bill that's been this enormous and have so many increases and cuts. It affects, nearly every sector of the economy."
