Trump’s Fiscal Federalism Shift Forces States Into Tough Choices

A sea change is underway in the federal-state government relationship. The federal government is pulling back significant state funding through executive actions and as part of the tax-and-spending reconciliation package signed into law July 4.

The reality of multi-trillion-dollar federal deficits in the foreseeable future makes clear that the status quo is unsustainable, but federal policymakers should prioritize solving the underlying budget imbalances—not just shifting costs from one set of government books to another.

For decades, Washington has steadily increased financial transfers to the states, entrenching a federal role in disaster relief, health, education, nutrition, and more. Programs that often began as emergency relief during the Great Depression nearly a century ago have (for better or worse) become enduring features of the federal-state relationship.

The story of the current realignment starts with the Trump administration’s “programmatic reviews” of enacted federal spending. These reviews are delaying billions of dollars appropriated by Congress and built into state budgets for the coming year. For context, about one-third of state spending is done with federal money.

In June, for example, the Department of Education notified states that funding they would normally be able to access starting in July wouldn’t be available during an indeterminate period of departmental review. This notification applied to an estimated $6 billion in federal funding, or about 14% of the federal government’s annual funding to states for K-12 education.

Following congressional importuning, these funds were belatedly released, but Office of Management and Budget Director Russell Vought has said the administration remains opposed to the funding and opposes future tranches of this spending.

Congress and the president also are shifting an estimated $6 billion onto state budgets annually for the Supplemental Nutrition Assistance Program, commonly known as food stamps. Starting in October 2027, states for the first time will be responsible for up to 15% of SNAP program costs if they fail to keep the rate of erroneous SNAP payments low. Today, only eight states and the Virgin Islands meet the standard that would exempt them from paying any SNAP benefit costs.

At the same time the federal government is increasing the financial stakes of states’ SNAP administration quality, it will be paying a smaller share of those administrative costs, moving from covering 50% to 25%. This amounts to an additional $3 billion a year for the states to fund starting in October 2026.

Similarly, in Medicaid, which always has been a shared fiscal responsibility, the state share of those costs is set to go up. The Congressional Budget Office estimates the new law will reduce federal Medicaid spending by an estimated $120 billion per year, with perhaps half of that representing a shift of costs onto states.

The remainder of the savings come primarily from a reduced number of people enrolled in Medicaid—an estimated 10 million over the next decade.

States will have fewer options to pay for their share of Medicaid expenses. Current practices exploit the fact that the federal government bears a disproportionate share of the costs of Medicaid. Many states impose special taxes on medical care providers to fund the state’s share and then redirect the resulting Medicaid funds back to those same providers. The new law cracks down on these provider taxes and state-directed payments.

As a conservative, I’ve long favored devolving programs to the states. But without statutory relief from the laws governing these programs, the abrupt reordering of federal-state fiscal arrangements will require states—49 of which have balanced budget requirements—to choose from a limited set of options.

They can try to get radically more efficient (assuming they can figure out how), reduce the provision of the services that were being funded by the federal government, sharply reduce other spending, or raise taxes.

As states grapple with these difficult choices in the months and years to come, they are going to need more prompt federal guidance and transparent, consistent administration of the laws. In particular, post-enactment programmatic reviews are adding a new layer of uncertainty and delay into the states’ planning and budgeting processes.

The stakes couldn’t be higher. How the states respond will critically impact state fiscal health, local economies, and ultimately the tens of millions of Americans who benefit from these programs.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jonathan W. Burks is executive vice president for economic and health policy at the Bipartisan Policy Center. He was chief of staff to former House Speaker Paul Ryan and a senior staffer for former Senate Majority Leader Mitch McConnell and the House Budget Committee.

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