Article Summary –
In 2026, states will face significant fiscal challenges due to a law signed by President Trump, which shifts more responsibility for social safety net programs, like Medicaid and SNAP, to the states, resulting in higher operational costs and potential federal funding cuts. States will need to decide whether to use state tax dollars to compensate for these federal cuts and consider implementing work requirements for Medicaid, which are expected to reduce Medicaid spending but potentially leave millions uninsured. Additionally, states have the option to adopt federal tax cuts on tips, overtime, and other items into their tax codes, with varying responses from different states on how to approach these changes.
States face crucial choices in 2026 regarding social safety net programs and taxes following a significant law signed by President Donald Trump. The federal government is transferring more responsibilities to states, which must prepare for increased costs in Medicaid and SNAP food assistance. States also need to decide whether to use state tax dollars to counterbalance federal cuts and consider reducing state taxes on tips and overtime.
Despite having sufficient rainy day funds, states encounter these challenges amid tight budgets reminiscent of early COVID-19 days. “There’s a big storm coming for state budgets,” said Tim Storey, CEO of the National Conference of State Legislatures, emphasizing the difficult decisions ahead.
These debates will commence in January when legislatures and governors outline agendas.
Heightened State Expenses for SNAP
The Supplemental Nutrition Assistance Program (SNAP), aiding 42 million Americans, will become more costly and challenging for states to administer. Currently, the federal government covers $94 billion in benefits, with a shared administrative cost of $6 billion. Starting October, states will bear three-fourths of administrative costs, and by 2027, states with over 6% payment errors must cover more benefit costs.
California has allocated $84 million to reduce SNAP errors, while Florida faces $50 million in administrative costs, potentially reaching $1 billion for benefits if required, as noted by Sky Beard, Florida director for No Kid Hungry. Consequently, states like New Jersey contemplate increased SNAP funding amid projected $36 billion Medicaid cuts over a decade.
Potential Medicaid Reductions
The Trump-signed law mandates work requirements for Medicaid adults, effective by 2027, influencing state budgets. Nebraska will introduce requirements in May, a move praised by Gov. Jim Pillen for its potential positive impact. However, preparing for Medicaid changes could cost millions, as illustrated by Missouri’s $33 million budget request for technology and staffing.
The work requirement targets higher-income Medicaid recipients from Obama’s 2010 health overhaul, affecting 40 states and D.C. The Congressional Budget Office predicts $911 billion Medicaid spending cuts, leaving 10 million uninsured by 2034. States might restrict Medicaid eligibility or reduce provider reimbursements, as seen in the District of Columbia, Colorado, and Idaho.
Liz Williams from KFF highlights potential limits on home care, dental benefits, and GLP-1 drugs. The changes are expected to impact rural hospitals severely, despite $50 billion federal offsets over five years.
Decisions on Tax Cuts
The federal law pauses taxes on tips and overtime, introduces new senior deductions, and numerous corporate tax breaks, offering states an option to integrate these cuts into state tax codes. Some states automatically align with federal tax changes, while others must decide their extent of adoption.
Michigan has opted into tax breaks for tips and overtime, with automatic carryover in other states. Arizona plans to adopt the federal tax cuts in January, with Democratic Gov. Katie Hobbs supporting the move to alleviate living costs, and Republican leaders ready to approve.
—
Read More Pennsylvania News
