States Face Budget Crisis After Cutting Taxes Before Federal Safety Net Overhaul

The Perfect Storm Brewing

A budget crisis is brewing across America as 26 states that have enacted sweeping corporate and personal income tax cuts over the past five years now face massive new costs from Trump's "One Big Beautiful Bill" Act. These states, which deprived themselves of billions of dollars in revenue during flush times, must now shoulder unprecedented expenses for programs they once relied on federal funding to support.

President Donald Trump's so-called One Big Beautiful Bill Act will shift billions in costs for SNAP and Medicaid to states. The legislation, signed in July 2025, fundamentally restructures how America's safety net operates by forcing states to cover portions of food assistance and healthcare programs that were previously fully federally funded. It makes a significant 12% cut to Medicaid spending while requiring states with an error rate above 6% to contribute to up to 15% of SNAP benefit costs.

The timing couldn't be worse. These state-level tax cuts, disproportionately benefiting the rich, have moved through legislatures with backing from powerful conservative organizations including the American Legislative Exchange Council, or ALEC, and the Koch brothers-founded Americans for Prosperity , which seized on an opportunity created by the pandemic — states were flush with cash from 2021 to 2023 largely because federal stimulus funding was flooding in — to make significant progress toward the long-term goal of eliminating state income taxes entirely.

The Real-World Impact

North Carolina exemplifies the challenge ahead. The state will likely have to start paying out an estimated $420 million annually in SNAP benefits that the federal government used to cover, based on the state's relatively high current error rate. Meanwhile, recent cuts to income taxes will cost the state $1 billion this coming year alone in revenue that could have been used toward any of these ends.

The human cost will be severe. CBO estimates OBBBA would cause 10.9 million Americans to lose health insurance coverage. Rural areas face particular hardship, as 1.8 million people in rural communities will lose their Medicaid coverage by 2034, with rural hospitals and clinics nationwide seeing a $50.4 billion reduction in federal Medicaid spending over the next decade.

Even though the proximate cause will have been the loss of funding for SNAP and Medicaid for lower-income people, those in the middle class will feel the consequences too. Everything from raising tuition at state universities to canceling unfinished state road projects to freezing state workers' salaries is now on the table, as states try to find the money to address the budget dilemma that they themselves are partly to blame for creating.

Political Paralysis

States find themselves trapped by their own recent decisions. Raising income taxes, especially after they've just been cut, is easier said than done, politically speaking. "We always try to get the Legislature to open up to the idea of raising revenue," said Craig Beck, research director at the OpenSky Policy Institute, a Nebraska think tank. "But we're met with just complete disregard."

Oklahoma state senator Dave Rader, who chairs the Republican caucus, admitted the bind his state faces. As the costs of SNAP and Medicaid are shifted onto states by the new federal law, those programs could have to be "eliminated" if he and his fellow lawmakers can't find a way to pay for them. And his colleagues' recent decision to set Oklahoma on what has been called a "path to zero" income taxes will "put us in an even less fortunate situation because of the decline in revenue."

A Crisis of Their Own Making

"The number of states that have cut taxes in the last five years, and the sheer size of the cuts, is nearly unprecedentedly large," said Wesley Tharpe of the Center on Budget and Policy Priorities. According to a ProPublica analysis of state tax trends since 2021, 26 states have lowered their income taxes, with 23 of them cutting their top marginal rate, which most benefits their wealthiest residents.

The federal legislation compounds the problem by eliminating key funding mechanisms states have used. Under the OBBBA, states can no longer use provider taxes to fund Medicaid. As a result, states will lose an estimated $340 billion in revenue and 1.2 million people will lose Medicaid benefits. For SNAP, states will now be responsible for 75% of the administrative costs, and the federal government will cover the remaining 25% , compared to the current 50-50 split.

As states grapple with this perfect storm of reduced revenues and increased responsibilities, the consequences will ripple through every aspect of public life