The long-term effects of the One Big Beautiful Bill Act on state budgets won't take full effect for two years but the warning lights are already flashing on the dashboard.
"There's a big storm coming for state budgets," said Tim Storey, CEO of the National Council of State Legislatures. "The radar is clear and it's going to hit almost every state."
The comments come in conjunction with NCSL's annual report on state legislative trends. Causes of the storm include the demise of pandemic relief funds and a new form of federalism that's pushing the costs of safety net programs onto the states.
"Recent federal legislation, shifted the cost of some programs to states some with immediate impact to state budgets and some that legislators may need to address in future fiscal years, particularly changes related to Medicaid and the Supplemental Nutrition Assistance Program," per the report.
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Most states have also been leaning into various forms of tax rebates, flattening rates, and cuts. According to NCSL's numbers 48 states have cut taxes since 2021.
"We have been in a tax reduction era now for at least three or four years," said Storey. "Now we're starting to see some wobble in the revenue estimates for the next year. I think you will see a slowdown, if not almost a complete halt on tax cuts."
NCSL's concerns are echoed by research by the Pew Charitable Trusts that chart out state tax revenue numbers, likening them to a recession.
"States now face a higher-than-normal risk of structural deficits, where recurring revenue is insufficient to support recurring expenditures," said Pew.
Wesley Tharpe, writing for the Center on Budget and Policy Priorities, a progressive think tank, believes states will need to embrace a "revenue-first approach," to weather the storm.
Revenues could come from any combination of "bolstering personal income tax, tackling corporate tax avoidance, exploring new taxes on wealthy households, and reforming property and sales tax."
"Without a clear revenue-first approach, state and local policymakers will have no choice but to enact steep cuts to not only their new responsibilities for health care and food assistance but also their full constellation of public services including education, housing, and infrastructure," writes Tharpe.
Several states including Rhode Island, California, Michigan, Delaware, and Pennsylvania are already weighing their options of decoupling their tax codes from the effects of OBBBA, a trend that is expected to continue.
According to tax accounting experts at Grant Thornton, "Such decoupling measures are guaranteed to impact the state income tax filing posture for both corporate and noncorporate taxpayers, adding to the complexity of navigating the 2025 tax compliance season."
Who will be making tax policy decisions at the state level in the near future are subject to the major changes promised by the 2026 election cycle and ongoing redistricting efforts.
"You've got 83% of all legislative seats up this year," said Storey. It's also the big Governor (race) year. It's an eternity between now and next November. Who can say today with any certainty which way the wind will blow?"
