States Face Crucial Decisions on Social Programs and Taxes by 2026
As states brace for the implications of a comprehensive law enacted by President Donald Trump, they confront pivotal choices affecting social programs and tax policies in 2026. The federal government is transferring more responsibilities to states, necessitating preparations for increased costs associated with Medicaid and SNAP, the Supplemental Nutrition Assistance Program. Additionally, states must deliberate on whether to use state tax dollars to offset federal funding reductions and consider aligning state tax policies with recent federal changes.
Despite many states maintaining robust rainy day funds, these challenges emerge as they encounter the most constrained budgets since the onset of the COVID-19 pandemic. “There’s a big storm coming for state budgets — the radar is clear — and it’s going to hit almost every state,” said Tim Storey, CEO of the National Conference of State Legislatures. “It’s going to mean some hard choices.”
State legislatures and governors will begin addressing these issues in January as they outline their agendas.
Escalating Costs for Food Assistance Programs
The SNAP program, which aids 42 million Americans in purchasing groceries, will see states bearing more of its operational expenses. Currently, the federal government covers the entire benefits cost and shares administrative expenses with states, amounting to approximately $6 billion federally in 2024. However, starting October 1, states will assume three-fourths of the administrative costs. By late 2027, states with payment errors exceeding 6% will face additional financial responsibilities.
California has already designated $84 million to reduce SNAP errors and assist counties with new requirements. In Florida, the administrative cost shift could reach $50 million annually, with potential benefit costs nearing $1 billion, according to Sky Beard, Florida director for No Kid Hungry.
New Jersey Assembly Speaker Craig Coughlin emphasized the state’s obligation to ensure access to healthcare and food, though he acknowledged the difficulty in maintaining all programs unchanged due to potential federal cuts.
Medicaid Adjustments and Work Requirements
Changes to Medicaid, under the federal law, include work requirements for certain adult recipients, which states must implement by January 2027, though they can opt to start sooner. Nebraska, for instance, plans to introduce work requirements in May, as announced by Governor Jim Pillen.
Other states, like Missouri, are preparing for substantial costs to comply with these mandates. The Missouri Department of Social Services has requested $33 million for necessary technology upgrades and over $12 million to hire staff for Medicaid eligibility reviews.
The Congressional Budget Office predicts that these Medicaid modifications will reduce spending by $911 billion through 2034, resulting in 10 million more uninsured Americans. States may respond by restricting Medicaid eligibility or cutting reimbursements to medical providers, as seen in the District of Columbia and states like Colorado and Idaho.
Decisions on State Tax Policies
The federal legislation includes temporary halts on federal income taxes for tips and overtime pay, new deductions for seniors, and corporate tax breaks. States must determine whether to align their tax codes with these federal changes.
Michigan is the only state to have voted in favor of adopting the tax breaks on tips and overtime, with about half a dozen other states automatically incorporating them into their tax codes. Arizona officials plan to conform to these federal tax cuts in their upcoming legislative session, with Governor Katie Hobbs highlighting the potential benefits for easing living costs.
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