A new report from the Center on Budget and Policy Priorities (CBPP) finds that state and local policymakers face a “one-two punch” of new federal costs and self-imposed fiscal pressures that threaten their ability to fund public services. To avoid deep cuts to education, infrastructure, and other services, the authors caution that states must act to protect and raise new revenue to offset the fiscal strain.
State Revenue Gaps The One Big Beautiful Bill Act (OBBB) creates both immediate and long-term fiscal pressures for states by shifting additional responsibility for major federal-state programs, according to the CBPP report. One key provision requires states, for the first time, to pay a share of benefit costs for the Supplemental Nutrition Assistance Program (SNAP), which historically has been fully federally funded.
It also tightens federal limits on state Medicaid provider taxes, an important financing tool that many states use to help fund their Medicaid programs, potentially making it harder to maintain current benefit levels and provider payment rates. These new federal cost pressures come at a time when many states have already reduced their own revenue capacity by enacting personal and corporate income tax cuts between 2021 and 2025.
Wesley Tharpe, senior advisor for state tax policy at the CBPP highlighted the gravity of these changes in a joint interview with Checkpoint’s and the report’s three authors. “The new cost responsibility coming down to states under SNAP for food assistance” is a direct consequence of the OBBB, Tharpe explained. “And the real risk and fear there is essentially not so much that states will be… cutting the existing funding because it’s new, but rather that they sort of will prove unable or unwilling to step up and meet that new required state match.”
He added that the fiscal strain extends beyond just food and healthcare to a “range of state services” like “public education, childcare, infrastructure,” and others that “are at significant risk here.”
While some lawmakers have expressed interest in protecting public education, the breadth of the new fiscal pressures makes it difficult to guarantee any area of the budget will be spared. CBPP Policy Analyst Joanna LeFebvre noted that historical precedent from the Great Recession shows that schools were not exempted from budget cuts during that time, so “it’s not guaranteed that schools will be protected.”
To Decouple or Conform The OBBB could reduce state revenues should states conform by mirroring certain provisions, according to the report. Most states with an income tax automatically align parts of their tax codes with federal law. When federal law creates new business tax breaks, conforming states generally adopt those changes as well, which can lower their own revenues. States that want to avoid these automatic revenue losses would need to take legislative action to decouple from the relevant federal provisions.
Clara Wilson, CBPP policy analyst and the report’s third author, said “some of the conversation around decoupling” starts with the intention to “avoid program cuts.” She used the example of Oregon, a state that “decoupled from some of the corporate and business provisions, which saves them about $300 million in revenue … a big chunk of that is being used to expand the Earned Income Tax Credit,” Wilson noted.
However, in other states, “there is an excitement not to decouple and keep the federal provisions. Wilson expects this decision to lead to cuts to state programs to absorb the costs, which “can mean public education.”
The report specifically flags the qualified small business stock exemption, “which overwhelmingly benefits people with incomes over $1 million,” and contends that the deductions for tips, overtime, and auto loans are “poorly targeted.”
Policy Considerations The authors recommend that states decouple from the federal bill’s most costly tax provisions, reject new state-level tax cuts, and raise new revenue from wealthy households and corporations.
LeFebvre cautioned against broad property tax cuts as a solution for addressing housing affordability, noting their negative impact on funding for local services like schools. “When the state comes in and caps or cuts that revenue for local governments, the impacts can be devastating,” she stated. “There’s really good research around property tax caps and cuts, their impact on school funding, and student outcomes that shows that there’s a negative relationship there.”
Instead, the report and its authors recommend more targeted solutions like property tax “circuit breakers” and renters’ credits. “A great way to address affordability for renters is through refundable renters tax credits, which put money back into their pockets,” LeFebvre explained. This approach would aim to ensure that relief is targeted, including renters who do not benefit from traditional property tax relief measures.
The authors later clarified that “[c]ircuit breakers can be extended to renters as renters’ credits. To maximize their impact on equitably improving affordability, they should be available to families with low incomes of all ages, not just seniors, be indexed to inflation, be large enough to meaningfully improve affordability, and be easy to claim through existing tax filing systems when possible.”
The authors urge policymakers in those states to reconsider past decisions to stop the revenue bleeding and make those dollars available to offset federal cuts. Tharpe emphasized that for many, this is the most immediate and impactful step they can take. “[I]t is a first order of business in so many states right now, in this moment, to not layer on additional harm and additional fiscal strain from what they’re already facing” since the OBBB’s enactment.
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
