Brace yourselves, because a significant shift is coming to state budgets! President Trump's recent law is poised to trigger major changes in how states manage crucial social safety nets and taxes. This isn't just a minor adjustment; it's a comprehensive overhaul that demands immediate attention.
The federal government is gradually transferring more financial and administrative responsibilities to the states. This means that in the coming years, states will be grappling with increased costs for essential programs like Medicaid (healthcare for low-income individuals) and SNAP (food assistance). They'll also be tasked with deciding whether to offset potential federal funding cuts with their own state tax dollars. And, as if that weren't enough, they must determine if they should adjust state taxes on items like tips and overtime wages to align with the new federal guidelines.
While many states currently have healthy 'rainy day funds,' these new financial burdens are arriving at a time when many states are already facing their tightest budget constraints since the onset of the COVID-19 pandemic.
Tim Storey, CEO of the National Conference of State Legislatures, paints a clear picture: "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."
These critical decisions will begin to unfold in most states starting in January, when legislatures convene and governors present their agendas.
Food Aid: A Growing Expense for States
The Supplemental Nutrition Assistance Program (SNAP), a lifeline for 42 million Americans who rely on it to buy groceries, is set to become more expensive for states to administer and potentially harder for some people to access.
Currently, the federal government covers the full cost of SNAP benefits – approximately $94 billion in the fiscal year that ended in September 2024 – and shares the administrative costs with the states. The federal share of administrative costs for 2024 was about $6 billion.
However, starting October 1st, states will be required to shoulder 75% of the program's administrative costs. Furthermore, beginning in late 2027, states with error rates exceeding 6% in their payments may be required to contribute to the benefit costs themselves.
California has already proactively allocated $84 million to reduce SNAP errors and additional funds to assist counties in implementing new requirements.
According to Sky Beard, the Florida director for No Kid Hungry, the shift in administrative costs could amount to roughly $50 million annually for Florida. If the state is forced to pay for some SNAP benefits, it could be in the neighborhood of $1 billion per year. This is why lawmakers are carefully scrutinizing the details of error rates.
But here's where it gets controversial: Some states are considering increasing their financial contributions to SNAP.
New Jersey Assembly Speaker Craig Coughlin, a Democrat, emphasizes the state's commitment to ensuring access to healthcare and food. However, he also acknowledges that the magnitude of potential federal cuts – potentially as high as a $36 billion reduction for New Jersey over the next decade for Medicaid alone, according to KFF, an organization that researches health policy – could make it challenging to maintain all of the state's social programs without changes.
“What there will be is a commitment to doing our level best to make sure that all of the people’s needs get covered,” Coughlin said.
Medicaid: Potential Cutbacks on the Horizon
The new federal law also introduces work requirements for certain adults on Medicaid, the joint federal-state health insurance program. Most states must implement these mandates by January 2027, requiring them to be factored into their upcoming state budgets.
But, states have the option to start sooner if they choose.
Nebraska Governor Jim Pillen has announced that his state will launch Medicaid work requirements in May. The Republican believes that the state can manage the changes without hiring additional government employees and that the work mandate “can have a gigantic impact in helping lift people up.”
But many states are facing tens of millions of dollars in costs just to prepare for the new Medicaid requirements.
The Missouri Department of Social Services has requested approximately $33 million in the next budget for technology upgrades to comply with Medicaid work checks and more frequent eligibility reviews. They are also seeking over $12 million to hire the equivalent of about 120 employees to carry out these tasks.
The work requirement applies to individuals with slightly higher incomes who are eligible for Medicaid under a voluntary expansion included in President Barack Obama’s 2010 health insurance overhaul. Forty states and the District of Columbia adopted this expansion. Interestingly, the states that did not agree to the expansion all have legislatures controlled by Republicans.
And this is the part most people miss: The work requirement is the most significant piece of a series of Medicaid changes that the nonpartisan Congressional Budget Office projects will reduce Medicaid spending by $911 billion through 2034 and leave 10 million more Americans uninsured over that same period.
States may respond by narrowing the eligibility criteria for Medicaid, as the District of Columbia did in a policy that took effect on January 1st. Alternatively, they could follow the lead of Colorado and Idaho and reduce Medicaid reimbursements to medical providers.
Liz Williams, a Medicaid analyst at KFF, suggests that home care, dental benefits, and coverage of GLP-1 drugs, often used for weight loss, could also face restrictions in some states.
Some changes are expected to hit rural hospitals especially hard. The federal law seeks to partly offset that by spending $50 billion over the next five years. States will have to decide how to use their share of that money.
Tax Cuts: A Balancing Act
The federal law also temporarily suspends federal income taxes on tips and overtime pay, introduces new tax deductions for seniors and certain individuals with auto loans, and includes various new corporate tax breaks.
States now face the decision of whether to incorporate these tax cuts into their own income tax codes.
Some states have income tax laws that automatically align with changes to federal tax laws. However, officials in other states must actively decide whether to adopt these changes, and if so, whether to do so partially or fully.
Michigan is the only state so far to have voted to opt in to the tax breaks on tips and overtime. These provisions automatically carry over to state income taxes in about a half-dozen other states.
Officials in Arizona are among those planning to conform to the federal tax cuts when their legislative session begins in January. Democratic Governor Katie Hobbs believes that embracing the tax breaks can help “ease the cost of living crisis” and provide certainty to taxpayers. Republican legislative leaders have expressed their support as well.
So, what do you think? Do you agree with the states' approaches to these new challenges? Are you concerned about the potential impacts on social programs? Share your thoughts in the comments below!
