Policy experts warned that the One Big Beautiful Bill (OBBB) is creating a fiscal crisis for states, forcing them to choose between cutting essential services or raising their own taxes.
During a press call February 10, analysts detailed how the law, which pairs large tax cuts for corporations and wealthy households with deep cuts to social programs, is imposing new costs and obligations on state governments.
State Budget Challenges
The One Big Beautiful Bill, enacted July 4, 2025, created a pair of interlocking fiscal challenges for states, according to Wesley Tharpe, senior advisor for state tax policy at the Center on Budget and Policy Priorities. The first challenge comes from the tax portion of the bill, which has begun to “wreak havoc on state revenue systems” due to the technical interactions between federal and state tax codes, a process known as conformity.
States that automatically conform to the federal Tax Code could see their own revenues decline unless they take action to “de-link” from the federal changes. This comes at a time when a broad swath of states have already made costly policy choices, with 26 states cutting either their personal or corporate income tax rates between 2021 and 2025.
The second challenge comes from the spending portion of the bill, which Tharpe described as containing some of “the largest spending cuts in history that take away people’s access to health coverage and groceries.” These federal spending cuts create new responsibilities for states. The law institutes new administrative requirements, most notably work requirements for Medicaid recipients, and states must now find funds to operate these new systems. The law also implements strict new limits on provider taxes, which states use to help finance their Medicaid programs.
In response to these federal pressures, many states are re-evaluating their own tax policies, with some choosing to break from the federal changes. Aidan Davis, state policy director at the Institute on Taxation and Economic Policy, argued that the OBBB was “completely out of step with what American public wants from the Tax Code.” She cited a spring 2025 Gallup poll finding that only 12% of the public thought the rich were paying too much in tax, and only 7% believed corporations paid too much. Davis said state lawmakers have an opportunity to reverse course and align public policy with American values.
Already, about 10 states have actively decoupled from some of the federal business tax cuts, choosing not to pass on those same cuts at the state level. Davis noted that some of the federal tax cuts are “borderline scandalous” when applied at the state level, such as the 0% tax for venture capitalists under the qualified small business stock provision, because the tax breaks often subsidize investments in other states.
State Response Case Studies
The situation is particularly stark in Kentucky, which is “on the front lines of the fallout from the federal budget mega bill,” according to Jason Bailey, founder and executive director at the Kentucky Center for Economic Policy. The state is pursuing a “march to zero” on its income tax, which has already been reduced from 6% in 2018 to 3.5% today. This has harmed the state’s capacity to deal with the new federal mandates.
Bailey noted that over 200,000 Kentuckians could become uninsured and 35 rural hospitals are at risk of closure due to the Medicaid cuts. He added that the richest 5% of Kentuckians are now receiving $3.4 billion a year from combined federal and state tax cuts, which is more than the state spends on its entire Medicaid program.
In contrast, Rhode Island has a history of tax changes that “overwhelmingly benefited the wealthiest households,” said Weayonnoh Nelson-Davies, executive director of the Economic Progress Institute. Her organization reported that if the state had kept its 2006 personal income tax structure, it would have collected about $590 million more this year alone.
She added that an estimated 50,000 Rhode Islanders are at risk of losing Medicaid because of the impact of the OBBB on the state’s already-strained budget. But Nelson-Davies also said that “Rhode Island policymakers are finally paying attention.” Governor Dan McKee (D) has proposed a 3% tax on millionaires that would raise an estimated $137 million annually, and legislative leaders have introduced a proposal for a top 1% tax that would raise about $203 million annually.
As states face these stark choices, Bailey warned that the consequences will be felt nationwide. “This monumental drama will play out in states like mine and will shape what ultimately happens in Washington on whether [the OBBB] is allowed to go fully into effect, or whether it is stopped, reversed, or ultimately replaced.”
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