States have major decisions to make in 2026 about the social safety net and taxes in the aftermath of a sweeping law President Donald Trump signed last year.
The federal government is shifting more responsibilities to states over the next few years, and states must prepare for greater costs in the Medicaid health care and SNAP food aid programs. They also must decide whether to offset upcoming federal funding cuts with state tax dollars. And they must weigh whether to cut state taxes on tips, overtime wages and other items to remain in line with Trump’s big bill.
Though most states still have ample rainy day funds, the extra burdens are coming as many states face their tightest budgets since the early days 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,” said Tim Storey, CEO of the National Conference of State Legislatures. “It’s going to mean some hard choices.”
In most states, those determinations will begin in January, when legislatures convene and governors lay out their agendas.
Food aid will become a bigger expense for states
The Supplemental Nutrition Assistance Program, which is used by 42 million Americans to help buy groceries, is going to become more expensive for states to run and harder for some people to qualify for assistance.
Currently, the federal government picks up the full cost of benefits — around $94 billion in the fiscal year that ended in September 2024 — and splits the administrative costs with the states, which run the program. The federal share of administrative costs for 2024 was about $6 billion.
Starting Oct. 1, states will have to pay three-fourths of the cost to run the program. And starting in late 2027, some states that make errors in more than 6% of payments — often for paying a household more than it’s supposed to get after its income rises — will have to start paying some of the costs of benefits.
California already has allocated $84 million to try to reduce SNAP errors, plus additional money to help counties implement other new requirements.
The shift in administrative costs could come to around $50 million a year in Florida, said Sky Beard, the Florida director for No Kid Hungry. Paying for some SNAP benefits, if the state is forced to, could be in the neighborhood of $1 billion a year. She said that’s a reason lawmakers have a lot of questions about the details of error rates.
Other states are weighing whether to put more money into SNAP.
New Jersey Assembly Speaker Craig Coughlin, a Democrat, said the state has an obligation to help people access health care and food. But he said the magnitude of federal cuts — as much 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 hard to keep all the state’s social programs unchanged.
“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.
States could consider scaling back Medicaid
The federal law signed by Trump imposes work requirements for some adults on Medicaid, the joint federal-state health insurance program for low-income people. Most states must start those work mandates by January 2027, which means they must be accounted for in their next state budgets.
But states can start sooner if they desire.
Nebraska Gov. Jim Pillen announced that his state will launch Medicaid work requirements in May. The Republican said the state could handle the change without hiring more government employees and that the work mandate “can have a gigantic impact in helping lift people up.”
But many states face tens of millions of dollars of costs merely to prepare for the new Medicaid requirements.
The Missouri Department of Social Services has requested about $33 million in the next budget for technology improvements needed to comply with Medicaid work checks and more frequent eligibility reviews. It’s seeking more than $12 million to hire the equivalent of about 120 people to carry out the tasks.
The work requirement applies to people 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 took up the offer. The states that didn’t agree to the expansion all have legislatures controlled by Republicans.
The work requirement is the biggest piece in a series of Medicaid changes that the nonpartisan Congressional Budget Office forecasts will reduce Medicaid spending by $911 billion through 2034 and leave 10 million more Americans uninsured over that time frame.
States could respond by narrowing who is eligible for Medicaid, as the District of Columbia did in a policy that kicked in Jan 1. Or they could follow Colorado and Idaho and cut Medicaid reimbursements to medical providers.
Liz Williams, who analyzes Medicaid at KFF, said home care, dental benefits and coverage of GLP-1 drugs often used for weight loss, also could 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.
States also face decisions on tax cuts
The federal law temporarily halts federal income taxes on tips and overtime pay, provides new tax deductions for seniors and some people with auto loans, and enacts numerous new corporate tax breaks.
States can decide whether to incorporate those tax cuts into their own income tax codes.
Some states have income tax laws that automatically conform with changes to federal tax laws. But officials in other states have to decide whether to link up — and whether to do so partially or fully.
Michigan is the only state so far to vote to opt in to the tax breaks on tips and overtime. Those 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 Gov. Katie Hobbs said embracing the tax breaks can help “ease the cost of living crisis” and provide certainty to taxpayers. Republican legislative leaders say they stand ready to give their approval.
