President Trump, Congressional Republican Proposals Would Shift Large Costs to States, Inflict Widespread Harm

Emerging proposals from the Trump Administration and key congressional Republicans could wreak havoc on essential public services, leaving millions of people worse off through lost health coverage, less money for groceries, weakened access to a quality public education, and other harms.^[1]

In some cases, proposals would reduce federal funding by seeking to shift greater costs onto states, such as by requiring them to pay for a larger share of the cost of Medicaid. In other cases, proposals would simply cut funding for a program without an explicit cost-shift to states; for example, if the federal government cuts support for public education, then either states and localities must increase their funding or overall resources for schools will fall. Given the sheer scope of federal support for states, along with the fact that states’ own revenue collections have increasingly shown signs of strain, policymakers at the state and local level are highly unlikely to backfill all the federal funding lost. That would mean reductions in critical services and states likely choosing to cut other areas in order to find the resources to replace some of the lost funding.

The federal budget includes considerable taxpayer dollars that are shared back with states and localities to deliver vital public services where people live and work. Composing about $1 of every $3 of state spending, these funds have a substantial impact on state economies and consumers’ costs for essentials such as groceries, health care, child care, and housing. Recent federal budget proposals, however, would shift significant costs, explicitly or implicitly, to states and localities by targeting health care, education, and food assistance. Proposed changes include capping program funding, lowering reimbursement rates, imposing onerous new state matching requirements, and adding administrative burdens or reducing flexibility.

In addition to the direct harm these measures would inflict on families and communities, many of them would send higher bills to state and local governments, which are already facing tougher fiscal conditions compared to recent years. This would leave state and local policymakers unable to fill in huge gaps in basic transportation, education, health care, and other critical needs. As Congress develops specific budget plans, it’s imperative for policymakers to reject harmful budget cuts and avoid policy changes that shift significant costs to states.

State Finances Are Highly Vulnerable to Federal Cuts

Although federal funds are often not discussed much during state budget debates, they are deeply integrated into service delivery and form a significant component of all state spending. Federal funds accounted for just over one-third of total state expenditures in state fiscal year 2024, which ended in June 2024 in most states.^[2] (See Figure 1.) Every state relied on federal funds in a meaningful way, and in 24 states the amount of federal funds spent exceeded state general fund spending. (See the Appendix.)

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Significant cuts in this support would be especially problematic now, given lackluster state and local revenue of late.^[3] Tax revenue fell in 40 states in fiscal year 2024, after adjusting for inflation.^[4] Growth rates since spring 2023 are somewhat below historical norms, and far below the historically high revenue growth that fueled surpluses in many states during the recovery from COVID-19.

State revenues have been moderating for several interlocking reasons, including a wave of large tax cuts that many states enacted in recent years, a surge of costly new private school voucher programs that states created, the expiration of pandemic-era federal aid, and an economy that’s leveled out from its post-COVID peak.^[5] As a result, a number of states are projecting short- to long-term shortfalls, and state-level cuts to education, Medicaid, transportation, and other critical investments are under consideration in several states.^[6]

Federal Proposals Could Significantly Harm States

Given the many connections between state and federal finances, changes in either the costs or funding that the federal government passes on to states will heavily impact state lawmakers as they make tax and spending decisions and work to balance their budgets each year, as practically all states are required to do. Several major federal tax and budget decisions that Congress might make this year could significantly disrupt state and local budgets and the services and people they support, as could actions taken by the Trump Administration.

• Deep Medicaid cuts that would shift costs to states and likely result in millions of people losing coverage. Medicaid is the largest shared state-federal program, with nearly two-thirds of overall state expenditures coming from federal dollars. Congressional Republicans have touted proposals to aggressively cut or transform the program, including:
  • Undermining the Affordable Care Act (ACA) Medicaid expansion by breaking the federal funding commitment. Forty states plus the District of Columbia have expanded Medicaid under the ACA, covering more than 20 million adults with low incomes. Reducing the federal government’s 90 percent matching rate for the costs of expansion would cut federal Medicaid funding that goes to states by approximately $561 billion over nine years, the Congressional Budget Office estimates.^[7] Facing huge added costs, a number of states likely would simply drop the expansion, causing many people to lose coverage. Some states would even be required to end the expansion by state law; 12 states have enacted “poison pill laws” that would end their expansion, automatically or nearly automatically, if the federal government’s contribution drops.^[8]
  • Capping and cutting Medicaid spending. Replacing Medicaid’s long-standing financing structure, under which the federal program pays a fixed share of states’ Medicaid costs, with a per capita cap in which states would receive a fixed amount of federal funding per enrollee regardless of their actual heath care costs, would cause deep and growing cuts over time.^[9] For example, if a per capita cap had been enacted in 2018, Ohio would have lost nearly $2 billion in federal funding by 2022, or 26 percent of state-funded Medicaid benefit spending.^[10] Also, if federal funding were fixed, states would have to absorb the full burden of cost increases due to unexpectedly high prescription drug costs, stresses to the health care system from a natural disaster, or other developments.

  • Work requirements and other burdensome red tape. Adding red tape to Medicaid, either by taking coverage away from people who can’t document that they work a required number of hours or by requiring them to prove their eligibility more frequently, would cause many people to lose coverage and impose additional costly administrative burdens on states. For example, when Arkansas attempted to implement work requirements in 2018, many people, including people with disabilities, lost coverage due to excessive red tape despite meeting the new requirements. In the first seven months of the requirement, 18,000 people — or 1 in 4 of those subject to it — lost coverage. Only a very small share regained coverage the next year.^[11]

    While states may see some savings when work requirements take Medicaid away from people, the restrictions are expensive for states to implement. And when people lose coverage, uncompensated care costs in state-supported hospitals and clinics rise. Overall, the policy means that the state loses federal funds and residents are left with less access to care.

• Cuts in annually appropriated non-defense spending, including public education. Roughly one-third of all annually appropriated federal funding outside of national defense goes to state and local budgets.^[12] These long-standing federal funding streams support a range of services including public schools, community development, child care, housing, law enforcement, mental health and substance use disorder treatment, and infrastructure like clean water projects.

  Congressional leaders still have to reach an agreement on funding levels for appropriated programs for the rest of this fiscal year for specific programs — many of which House Republicans have proposed to cut deeply.^[13] In addition, those same leaders may push for capping overall non-defense appropriations for the next two years, either by freezing spending at current levels with no adjustment for inflation even as costs rise or cutting it below current levels. Cuts in this part of the budget would almost surely result in less federal funding for various state- and locally operated programs.

  Of particular note is the potential for steep cuts in federal support for public education, either through reduced spending for current federal grant programs or the diversion of federal dollars from public education to private schools (as evidenced by President Trump’s January 29 executive order to expand federal support for “school choice”).^[14]

• Cuts to food assistance and other federal assistance programs. The Trump Administration and congressional Republicans also seem poised to pursue substantial cuts to SNAP and potentially other income support programs like TANF, which would put millions of people in the U.S. at risk of losing food assistance or other vital benefits.^[15] Harmful proposals from Republican lawmakers include requiring states to pay a portion of SNAP benefit costs, which are currently 100 percent federally funded, for the first time.^[16]

  Shifting even a small share of SNAP benefit costs to states would strain state budgets and force states to cut benefits or restrict eligibility. This harm would be particularly acute during recessions, when state revenues plummet but more people need food assistance, worsening food insecurity and undermining SNAP’s role as an important economic stimulus. Shifting costs to states could mean that federal policymakers enact massive SNAP cuts without specifying which participants would be harmed and leave that decision to the states.

  Other SNAP cuts, like across-the-board benefit cuts over time and a broadening of policies that take food assistance away from people who don’t meet a work requirement, would withdraw federal funding coming into the state, its grocery stores, and its economy while increasing demand on state- and locally funded service providers like food pantries. Many of the changes under consideration would also increase paperwork burdens on state agencies.

• Premium spikes for people in marketplace health plans. Enhancements to the premium tax credit — in place since 2021 — have made health insurance in the ACA marketplaces more affordable and spurred record coverage gains. But they are set to expire at the end of 2025; if they do, premiums that people pay for marketplace coverage will spike in every state, with the average annual increase ranging from $360 to $1,860 per person. Four million people are expected to become uninsured in the first year alone.^[17] Like Medicaid cuts, this can increase uncompensated care costs and leave state residents with less access to health care they need.

  In addition, nine states — California, Colorado, Connecticut, Maryland, Massachusetts, New Mexico, New York, Vermont, and Washington — have built upon the ACA marketplaces to further reduce premiums and/or reduce or eliminate deductibles for select enrollees. The improvements are funded in part by premium tax credit dollars, so sharp reductions would mean less funding for states and potentially tough choices for some about whether to continue them or scale back.

• Shifting disaster response costs to states. Another idea emerging out of the Trump Administration is to shift responsibility for responding to natural disasters such as hurricanes and wildfires from the Federal Emergency Management Agency (FEMA) to the states.^[18] Created in 1979, FEMA helps respond to disasters when local leaders request a presidential emergency declaration, a signal that the damage is beyond the state’s practical or financial ability to handle on its own. Over the past three federal fiscal years, the agency spent on average about $40 billion annually responding to critical emergencies.^[19]

  President Trump has issued an executive order creating a task force to examine whether and how FEMA should change, including how states might play a larger role. Some conservative allies have proposed reducing how much money the agency should provide. The eventual impact on states would largely depend on the specific changes enacted by Congress or if Congress and the President no longer enacted disaster relief funding in response to major events, like the wildfires in California or the flooding in North Carolina.

  If Congress scaled back the federal role in responding to disasters, the added costs could be substantial. For example, North Carolina leaders estimate that it could cost at least $60 billion to complete the remaining recovery efforts and rebuild affected communities from Hurricane Helene — a sum roughly twice the size of the state’s general fund.^[20] A reduced federal role would mean disaster-prone states, like Florida, Louisiana, and Texas, would get far less help over time from the rest of the country in responding to disasters.

• Withholding federal funds from states through “impoundment.” President Trump apparently intends to pursue a strategy of “impounding” federal funds, where the President refuses to spend certain funds legally appropriated by Congress.^[21] When President Nixon tried to impound funds, various courts and the Supreme Court found the actions to be unconstitutional. In 1974, the Impoundment Control Act was enacted, which describes the actions a President must take to request that Congress withdraw funding from a program or programs but reiterates the constitutional principle that the decision about whether to do so rests with Congress. Despite the clear legal record, the Trump Administration and its nominee for Office of Management and Budget (OMB) director, Russell Vought, have signaled that they believe they have the authority to withhold appropriated funds.^[22]

  On January 27, OMB ordered all federal agencies to temporarily block disbursement of grants and loans in an unprecedented move that immediately threw funding for schools, veterans’ services, jobs programs, housing, climate projects, public safety, and an array of other public services into jeopardy. While the situation remains fluid,^[23] the episode is clear evidence that the Administration may try to subvert Congress and withhold funding with which it disagrees.

• New budget cuts recommended by DOGE. While the mission of the Department of Government Efficiency, which Elon Musk will run for President Trump, has been somewhat of a moving target, it is widely expected to recommend budget cuts to the President, which could form the basis of illegal impoundment efforts, congressional budget-cutting proposals, or both.