States Face Budget Challenges with New Federal Laws by 2026

States Prepare for Budget Challenges Amid Federal Law Changes by 2026

With the enactment of new federal legislation by President Donald Trump, states are preparing to navigate significant changes that will affect their budgetary decisions regarding social programs and taxes. As the federal government delegates more responsibilities to states, they face rising costs in critical welfare programs such as Medicaid and SNAP (Supplemental Nutrition Assistance Program).

State governments are now tasked with determining whether to utilize their own tax revenues to compensate for reductions in federal funding. Many states are also examining how to recalibrate their tax policies in light of these new federal provisions.

According to Tim Storey, CEO of the National Conference of State Legislatures, states are on the precipice of challenging economic times: “There’s a big storm coming for state budgets — the radar is clear — and it’s going to hit almost every state. It’s going to mean some hard choices.” As legislatures convene in January, they will begin to address these formidable issues.

Increased Costs for Food Assistance Programs

The SNAP program, which supports the grocery needs of 42 million Americans, will soon transfer a significant portion of its operational expenses to the states. Currently, the federal government covers all benefits related to SNAP and shares administrative costs, totaling approximately $6 billion for 2024. However, starting from October 1, states will become responsible for 75% of the administrative costs. States will face additional financial burdens for payment errors exceeding 6% by late 2027.

California has proactively allocated $84 million to mitigate SNAP error rates and assist local counties with compliance. In Florida, officials estimate that the ongoing administrative costs could soar by $50 million yearly, alongside potential benefit expenses that could approach $1 billion, states Sky Beard, the Florida director for No Kid Hungry. New Jersey's Assembly Speaker Craig Coughlin pointed out the state's commitment to maintaining access to essential services, but acknowledged the complications presented by federal funding cuts.

Modifications to Medicaid and Work Requirements

Recent changes to Medicaid will implement work requirements for certain adult beneficiaries, which states must start by January 2027, although they can opt to initiate these changes earlier. Nebraska's Governor Jim Pillen has announced plans to establish work requirements from May.

Missouri is preparing for significant expenditures to meet these federal mandates, with the Department of Social Services seeking $33 million for technology upgrades necessary for compliance, in addition to over $12 million for staffing Medicaid eligibility reviews.

The Congressional Budget Office has projected that these adjustments to Medicaid could result in a reduction of spending by $911 billion by 2034, but could also leave an additional 10 million Americans uninsured. In response, states might restrict Medicaid eligibility or decrease reimbursement rates to healthcare providers, as seen in regions like the District of Columbia, Colorado, and Idaho.

Considerations for State Tax Policies

The recent federal legislation introduced various changes to tax structures, including temporary suspensions on federal income taxes for tips and overtime pay, new senior deductions, and corporate tax incentives. This prompts states to decide whether to align their local tax mechanisms with these federal changes.

Michigan has been the only state to formally adopt tax breaks concerning tips and overtime. However, about half a dozen states have automatically integrated these provisions into their tax codes. Arizona is also planning to align with the federal tax cuts in the next legislative session, with Governor Katie Hobbs emphasizing potential benefits for residents facing rising living costs.