State legislatures next year will need to adjust annual spending plans to accommodate revisions in key allocations outlined in the recently adopted fiscal year 2026 (FY26) federal budget.
HR 1, the One Big Beautiful Bill Act, the FY26 budget signed into law by President Donald Trump on July 4, makes wholesale changes to tax codes and a range of other state-administered programs, most notably Medicare, Medicaid, and SNAP.
According to a July 30 analysis by Bill Kramer, vice president of MultiState, and the National Association of State Budget Officers’ annual Fiscal Survey of States, HR 1 will have little impact on already-adopted FY26 state budgets.
“Many provisions will not go into effect until late 2026 or beyond, so states have some time to begin preparing for the changes,” Kramer said.
The good news is that most state budgets are in good shape, a panel of fiscal analysts said in a first-day presentation during the Aug. 4 to Aug. 6 National Conference of State Legislatures (NCSL) 2025 Legislative Summit in Boston, a convention attended by nearly 2,000 state lawmakers and more than 9,000 people in total.
“Overall, states ended Fiscal Year 2025 in a fairly strong position,” NCSL Fiscal Affairs Program Principal Erica MacKellar said.
Mackellar noted that while the 2008 mortgage/housing crash and 2020–2022 COVID-19 pandemic slashed state revenues, $7 trillion in assistance approved by Congress between March 2020 and August 2022 funneled money into state reserves, or “rainy day” accounts.
“During the pandemic, state revenues took a big hit, but not as much as experts were predicting,” she said. “And as states recovered, they unexpectedly saw these big revenue surpluses, and that was due to a number of factors, including the large amount of aid the federal government sent to states.”
MacKellar said the federal largesse was augmented by higher-than-expected revenues. States’ primary sources of income are sales taxes, licensing fees, and, in 43 states, income taxes.
The “revenue picture” for states has been “a bit of a roller coaster” for two decades, she said, estimating aggregate state post-pandemic revenue growth at about 15 percent.
“[States] have been planning for a return to a normal level of state revenue growth and a revenue slowdown that I think we’re seeing now,” MacKellar said, citing reported FY25 average state revenue growth of about 2.4 percent, and projected 1 percent revenue growth in FY26.
“Our forecast for the economy is to slow but still grow,” she said. “That’s a good thing.”
States were tightening belts before the 2024 election and HR 1’s adoption, according to MacKellar.
“In fiscal year 2026, states are projected to spend about 0.6 percent less on average than they did in fiscal year 2025,” she said, noting that many states were “asking agencies to submit either flat budgets or to prepare for some program cuts.”
“I think that’s a trend that we’ll see continue,” she said. “The good news heading into a slower-growth period is that states have really built up their ‘rainy day’ funds.”
Wait-And-See Mode
Geoffrey Buswick, S&P Global U.S. public finance director, concurred, noting that state bond ratings—or credit ratings—are the best in a generation.
“The states are in a very, very, very strong position right now, about the strongest we’ve ever seen,” he said. “We haven’t had a [bond rating] downgrade of a state since 2021.”
Among concerns, even before HR 1, were sluggish home sales and high interest rates, Buswick said. A possible reduction in the Federal Reserve benchmark rate in late 2025 and HR 1’s federal tax rate cuts could animate homebuilding through low-income housing tax credits in the coming years, he said.
But with HR 1 shifting more of the funding burden from the federal government to states for Medicaid and Medicare and for emergency recovery efforts by 2027, state lawmakers will need to take action during their 2026 legislative sessions, he said.
HR 1 will eliminate “tens of millions” of dollars from many state budgets in the next decade, forcing adjustments that will “mean some choices and levers being pulled so something else doesn’t get funded,” Buswick said.
Medicaid cuts, projected to near $1 trillion over the next decade, would be a 7 percent revenue slash over the next 10 years for all 50 states combined.
“Seven percent at any time is hard, but over 10 years, there’s a little more wiggle room,” Buswick said, telling lawmakers and staffers that the estimate reflects impacts that would occur “without the work you do” in adjusting budgets to the changes.
The real potential crunch for states will unfold from 2028–2032, he said, noting S&P Global is eyeing how the Virginia, Kentucky, and Wyoming state legislatures put together biennial budgets during their 2026 legislative sessions.
“They’re going to go through ’27 and ’28 [budgets], and you have two [Medicaid] expansion states and one non-expansion state, so just about all the provisions that are coming in for the Big Beautiful Bill will have to be considered,” Buswick said. ”It’s going to be pretty telling.”
Forty states and Washington D.C. have expanded Medicaid programs under 2010’s Affordable Care Act, also known as Obamacare, extending medical coverage to adults with incomes of up to 138 percent of the federal poverty level. The remaining 10 states receive varied block grants in managing their own programs.
State lawmakers at the NCSL Summit told The Epoch Times that they’re ready for the challenge, all noting their states are constitutionally required to balance annual budgets. Only Vermont does not have a balanced budget amendment encoded into its state constitution.
“We’ll tighten our belt and budget what programs” are necessary and essential, Utah state Sen. Ronald Winterton, a Republican, said. “We will make adjustments.”
Rhode Island state Sen. Robert Britto and Arkansas state Rep. Jessie McGruder, both Democrats, said their legislatures are in a wait-and-see mode.
“Those changes will affect everyone. I don’t think any state will be immune,” McGruder said, noting that while the Medicaid and Medicare changes won’t kick in for “two, three years, I don’t know if we got a couple of years” because “we’ll feel it quickly in Arkansas.”
South Dakota state Sen. Larry Zikmund and New Hampshire state Rep. Jim Kofalt, both Republicans, said a lot can happen between now and the 2026 sessions, so they’ll know more then than they know now.
“We’re in good shape,” Zikmund said. “Our economy is not booming right now, but it is stable.”
Kofalt said, “We’re still getting our hands around it. We’re still trying to assess impacts.”
