States are gearing up for crucial decisions in 2026 concerning their social safety nets and taxation policies in the wake of a significant law signed last year by former President Donald Trump.
The federal government is shifting more responsibilities to states over the coming years, which means state budgets will face increased strain from Medicaid healthcare programs and the Supplemental Nutrition Assistance Program (SNAP). Furthermore, state officials must deliberate on whether to counteract impending federal funding cuts using state dollars, as well as contemplating potential tax adjustments to synchronize with Trump's legislation.
While many states currently report robust rainy day funds, they are concurrently grappling with their tightest budgets since the onset of the coronavirus pandemic. There’s a big storm coming for state budgets — the radar is clear — and it’s going to hit almost every state, remarked Tim Storey, CEO of the National Conference of State Legislatures. It’s going to mean some hard choices.”
Starting January, state legislatures will reconvene and governors will outline their agendas, as many decisions regarding budget alterations are anticipated to commence.
Increasing Expenses for Food Aid
The SNAP program, already vital for 42 million Americans, is poised to become more costly for states, with new restrictions making it challenging for some individuals to qualify for assistance. The federal government currently covers the full cost of benefits, estimated around $94 billion for the fiscal year ending September 2024, while managing administrative expenses in partnership with the states. However, starting October 1, states will bear three-quarters of the operating costs associated with SNAP, a significant financial shift.
California has already earmarked $84 million to attempt to mitigate SNAP errors and support counties in adapting to these changes. Florida officials anticipate an additional burden of approximately $50 million annually for SNAP administrative costs, with total potential expenses reaching around $1 billion if the state must cover some benefits, raising critical questions for lawmakers about error management.
Medicaid Alterations on the Horizon
As states adjust to new Medicaid requirements that mandate work for some adults, financial implications will ripple through state budgets beginning in January 2027. States have the flexibility to implement these requirements earlier, as seen in Nebraska where plans are in motion to start in May.
Many states are already faced with significant financial commitments to prepare for these changes — the Missouri Department of Social Services, for instance, seeks approximately $33 million for necessary technological advancements to comply with new regulations.
Taxation Decisions Ahead
The federal legislation also pauses income taxes on tips and overtime pay, introduces tax deductions for specific demographics, and enacts new corporate tax reliefs. States that possess laws aligning their tax structures with federal changes now confront decisions regarding the integration of these federal tax breaks into their own income tax codes.
As states ready for their legislative sessions, leaders like Arizona's Democratic Governor Katie Hobbs advocate for conformity with tax breaks, arguing it alleviates living costs for residents. Michigan has already opted into these tax benefits, and an array of other states will similarly have to weigh their options as financial burdens loom large on the horizon.
