States Must Prioritize Revenue to Support People and Communities in Wake of Harmful Republican Megabill

As states move closer to their 2026 legislative sessions, lawmakers nationwide are grappling with how to respond to fallout from recent federal policies, including this July’s harmful Republican megabill, which financed enormous tax breaks for wealthy households and corporations by pushing substantial new costs and administrative hurdles onto states.

The answer to that question is clear: state policymakers must embrace a revenue-first approach. This is essential for them to help counteract historic federal cuts to health care and food assistance, mitigate the risk of second-order cuts to education and other vital services, weather an uneven economy straining under tariffs and other disruptive Trump Administration policies, and fuel bold new investments that serve the best interest of their communities and ensure residents’ needs are met.

The cuts to health care, food assistance, and climate investments championed by President Trump and congressional Republicans will translate into considerable new costs for states and localities over the next few years. The megabill’s sweeping tax elements are already wreaking havoc on state revenues, due to technical interactions between federal and state tax codes known as “conformity.” These new federally imposed costs also come at a time when many states are facing intensifying pressure from recent policy choices of their own, especially widespread tax cuts approved in the past few years.

Costs from the federal bill will soon grow as states will need to invest considerable funds to set up and operate sweeping new administrative requirements for health and food programs, most notably onerous new work requirements in Medicaid. Coming next will be larger costs, including strict new limits on state “provider taxes” that help finance Medicaid and a new requirement for states to shoulder — for the first time in history — a substantial share of SNAP food benefit costs. States and localities will also increasingly face spillover costs from the megabill’s cuts to affordable health coverage in particular, which are poised to send a surge of newly uninsured people seeking costlier, uncompensated care to local emergency rooms and clinics.

Given that states and localities must balance their budgets, these new cuts and costs would prove difficult to manage under almost any circumstances, but the timing could also hardly be worse.

State and local finances have already been showing considerable signs of strain, due in large part to fallout from policy choices many states themselves enacted. Those include the swelling price of regressive state tax cuts, a surge in costly new private school voucher programs, and a growing trend of state and local property tax cuts. Those policies now require revisiting and provide an important opportunity for state policymakers to show leadership, reverse course, and ensure their states have the resources they need to invest in access to health care, food benefits, good schools, and other priorities.

Nearly 30 states have enacted personal and corporate income tax cuts since 2021, and the price tag in several states will soar to billions of dollars over the next few years. For policymakers in these states, mitigating potentially extreme damage from recent federal policy will require working to trim, delay, and ultimately reverse as many of these revenue-losers as possible. This would be similar to the years-long push in Kansas that led to Gov. Brownback’s extreme “tax cut experiment” being overturned by a bipartisan supermajority, or the sustained push in Illinois that effectively ended the state’s growing voucher program.

All states should begin working to both protect existing revenues and raise new ones, most especially from the same wealthy households and corporations that just reaped a historic windfall from tax cuts on the federal level.

Without a clear revenue-first approach, state and local policymakers will have no choice but to enact steep cuts to not only their new responsibilities for health care and food assistance but also their full constellation of public services including education, housing, and infrastructure. That would leave residents less able to afford to meet their basic needs and facing reduced quality and access for state and local services such as schools, roads, and health care.

In the immediate term, states should take a hard look at delinking from as many of the most costly conformity impacts of recent federal tax cuts as possible, such as expansive new tax breaks for multinational corporations, as policymakers in Colorado and District of Columbia recently did.

Beyond that, states should consider a wide range of revenue-raising levers for responding to fiscal pressures and building stronger and fairer revenue systems, including:

• bolstering personal income taxes;
• tackling corporate tax avoidance;
• exploring new taxes on wealthy households;
• reforming property and sales taxes to more closely track ability to pay; and
• leaning in on an emerging suite of revenue-raising tools linked to helping fight climate change.

Several states in recent years offer compelling models for how ambitiously pursuing new revenues can help pave the way to grow more prosperous and equitable over time. In states such as Colorado, Maryland, Massachusetts, Minnesota, New Mexico, and Washington State, recent revenue-raising policies are already paying dividends: helping to shore up states’ bottom-lines and fuel new investments like universal free school meals, expanded child care and paid leave, school construction and college access, and more affordable housing options.

While the combination of the federal megabill and recent regressive state policy choices will cause a great deal of harm, there is also an incredible opportunity for more forward-looking policymakers to step to the fore. By adopting a revenue-first response, states and localities now hold real potential to mitigate harm for millions of residents and raise the revenues needed to lay the foundation for a more equitable and prosperous future.