How States Are Assessing the Impact of Federal Policy Changes
Program and tax changes in massive budget reconciliation bill are reshaping states’ short- and long-term fiscal pictures
Congressional passage of the massive budget reconciliation measure, H.R. 1, in July set in motion a new federal-state fiscal dynamic—and states are moving fast to adapt. The law reshapes three policy areas key to state budgets: tax revenue, Medicaid, and the Supplemental Nutrition Assistance Program, or SNAP, which provides food stipends for tens of millions of low-income individuals and children.
Preliminary state actions and discussions since the measure became law on July 4 show that some changes are already creating near-term costs, while others are projected to drive larger budget pressures as they are phased in. At the same time, state policymakers are already contending with sluggish revenue growth, rising spending pressures, and declining fiscal flexibility.
State budgets affected in three key ways
Congress passed H.R. 1 through what is known as the budget reconciliation process, a procedure that allowed the measure to advance with a simple majority vote.
On tax policy, the bill extends and modifies many provisions enacted during President Donald Trump’s first term in 2017. State tax codes link or “conform” to the federal code to varying degrees. For instance, nearly all states that collect personal income taxes use the federal definition for taxable income. In states that automatically conform, changes to those definitions can directly affect state revenues, increasing collections in some states and reducing them in others.
Changes to Medicaid—the health care assistance program for low-income individuals that is also the largest source of federal funds in most states—also bring fiscal consequences. For example, H.R. 1 created new work and community engagement requirements and added more frequent enrollment eligibility checks. These changes are projected to reduce enrollment and result in fewer federal dollars to support these state-operated health programs. States, meanwhile, will need to invest in additional staffing and IT systems to help implement these new mandates. The law also limits state taxes on health care providers, which have helped states pay their share of Medicaid. States will now have to shoulder more of the cost from their general funds or reduce benefits.
Similarly, changes to SNAP will shift more financial responsibility to states by requiring them to take on a larger share of the program’s administrative costs. In addition, states with higher rates of benefit payment errors will for the first time be required to pay part of the benefits themselves. In effect, states that make more payment mistakes must cover a greater share of benefit costs.
Because some H.R. 1 provisions phase in gradually, their full budget impact won’t be felt at the same time in every state. Tax provisions may create immediate fiscal pressures in states that automatically conform to federal law, while the effects may arrive on a rolling basis for those that do so only selectively. The new Medicaid work and community engagement requirements start in January 2027. States’ share of SNAP administrative costs, meanwhile, rises in October 2026, and potential benefit cost increases, tied to payment error rates, begin a year later. Reductions in Medicaid health care provider taxes begin in late 2027.
Initial analyses paint a complicated picture
States took some action earlier this year in anticipation of shifts in federal funding and tax policy. But following passage of H.R. 1, policymakers are analyzing how exactly its provisions will hit budgets and compound existing fiscal headwinds. Initial fiscal estimates point to near- and long-term challenges.
Tax code changes are already reducing revenues in many states and, in some cases, creating or exacerbating projected budget gaps. Colorado projected a deficit in fiscal year 2026 due to revenue losses of $1.2 billion from automatically aligning with the new federal code. Arizona and New Mexico estimate at least $100 million in general fund losses across multiple upcoming fiscal years, and many others—such as Maryland—expect declines unless they take legislative action to decouple from the federal changes. Pennsylvania, which recently did so as part of its fiscal 2026 budget, offers one example. Notably, states are expected to have access to temporary funds for health-related uses under the Rural Health Transformation Program included in the law, but some state analysts say those funds are not an adequate substitute for ongoing revenue losses.
State analyses also estimate how Medicaid and SNAP mandates will increase administrative costs, which will ramp up spending even before larger federal cost shifts arrive. The Colorado Legislative Council Staff, for example, estimates an additional $10.7 million for SNAP administration in fiscal 2027, while Wisconsin’s Legislative Fiscal Bureau pegs its cost increases at about $50 million per year.
But the biggest structural risks to state budgets are projected to emerge in future years as federal cost-sharing for key programs diminishes.
“Reduced federal funds have multiplier effects—like a stimulus in reverse,” said Matthew Knittel, director of Pennsylvania’s Independent Fiscal Office. Although near-term costs can often be absorbed with reserves or one-time adjustments, structural pressures will mount in the later years. New Mexico, for example, estimates new recurring costs related to federal Medicaid and SNAP will total about $620 million in fiscal 2027 and rise to just over $1 billion by fiscal 2029. As those obligations climb, the state’s overall bottom line shifts from a modest surplus in fiscal 2026 to a projected $2.1 billion deficit in 2029.
One major unanswered question is how these shifts will affect demand for state services as individuals and families, nonprofits, businesses, and local governments adjust to the federal changes. States could soon be asked to do more with fewer or uncertain resources.
These assessments, however, are preliminary.
“There are still many questions,” said Kathryn Vesey White, director of budget process studies at the National Association of State Budget Officers, “and states are waiting on guidance for implementing various provisions that will affect them.”
Meanwhile, Arizona’s Joint Legislative Budget Committee is updating its analyses as agency requests come in, noting that costs will depend on staffing, IT systems, and program design choices. Rhode Island is waiting on federal guidance that could change the size and timing of the impact. But with federal funding representing more than one-third of Rhode Island’s budget, state Office of Management and Budget Director Brian Daniels noted that “the state cannot backfill a major loss of federal funds. We cannot tax our way out.”
States begin to respond
Several legislatures have reconvened for special sessions to address some of the more immediate budget issues. Colorado’s special session in August addressed the state’s roughly $750 billion budget deficit by raising revenue, tapping reserves, and cutting spending. In October, New Mexico held a special session that culminated in the governor signing four bills to provide funding to maintain SNAP benefits and administration, implement changes to SNAP and Medicaid eligibility requirements, reduce costs for beneficiaries impacted by expiring health exchange credits, and provide additional support for rural health care delivery. Connecticut policymakers have scheduled a special session in November to appropriate a portion of state surpluses toward programs with federal funding exposure.
States are also relying on special task forces or committees created before H.R. 1 passed to monitor and adjust to federal changes. New Mexico, for example, established its Federal Funding Stabilization Subcommittee earlier in 2025 to track shifts in the federal-state fiscal relationship. That panel is now examining the implications of the federal budget bill. Vermont’s task force, meanwhile, concluded its work in June, warning that state reliance on federal transfers makes it “clear that ongoing attention will be needed to prepare for and mitigate emerging challenges to Vermont’s economy.”
State policymakers are also identifying other needs associated with implementing H.R. 1’s mandates and the resources necessary to meet them. This year, the Arizona Department of Economic Security requested an additional $12 million in supplemental nonrecurring funds for fiscal 2026 and an additional $75.8 million in new recurring funds starting in fiscal 2027 to manage the federal policy changes to SNAP and Medicaid.
Facing the potential for significant added costs from higher rates of SNAP payment errors, Pennsylvania is considering hiring outside consultants to help analyze and recommend solutions, while Rhode Island has already brought one on.
For Medicaid, the new work and community engagement requirements, along with more frequent eligibility checks, are expected to drive new staffing and IT costs. Arizona’s Medicaid agency has requested $19 million to help cover these needs in fiscal 2027, noting that the changes will increase the state’s financial burden and force difficult policy decisions as provider revenues decline over time.
Final thoughts
Across states, initial projections of the reconciliation bill’s effects are clear: some immediate costs now, and much larger structural costs on the horizon. Revenue losses are already showing up in some states where tax conformity is automatic, while near-term Medicaid and SNAP changes are spurring new administrative expenses before the remaining provisions of H.R. 1 phase in gradually during the years ahead.
These pressures come as state fiscal conditions are already tightening amid slower revenue growth, rising costs, and long-term commitments that are straining budgets. Record-high budget reserves can serve as a temporary bridge, giving policymakers time to assess their options, but they cannot permanently replace federal funding losses. For now, states are managing near-term fiscal pressures while preparing for the policy changes and uncertainties that lie ahead.
Rebecca Thiess is a manager with The Pew Charitable Trusts’ managing fiscal risks project, and Justin Theal is a senior officer with Pew’s Fiscal 50 project.
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