With Uncertainty Looming, States Face Test of Budget Resilience

With Uncertainty Looming, States Face Test of Budget Resilience

Budgeters must align spending with the new, less optimistic revenue realities.

In a recent NCSL survey, several states, including Alaska, Nebraska, Pennsylvania, Vermont and Wyoming, said their legislatures are likely to address the perennial issue of K-12 funding in the coming year. (Credit: Goodboy Picture Company/Getty Images)

After years of smooth sailing, the state budget forecast includes a few clouds and a lot of uncertainty.

Coming out of the pandemic, states experienced a few years of robust revenue growth, providing lawmakers with ample means to support their funding priorities. They put money into big infrastructure projects, boosted economic development and rolled out both temporary and permanent tax cuts.

Knowing that kind of revenue spike couldn't last forever, lawmakers took a cautious approach to this year's budget. Even so, they managed to support numerous policy initiatives using surplus funds from earlier years. But the outlook for the coming year is less optimistic, with many states likely to hold spending flat and some even cutting back.

Midway through fiscal year 2026, state fiscal conditions are largely stable, but challenges loom for FY 2027 and beyond. According to preliminary results of an NCSL survey of legislative fiscal offices, most states expect to meet or exceed their latest revenue estimates. In most cases, revenue projections have not been revised since the beginning of the fiscal year or have been revised slightly upward. (Many states used cautious revenue forecasts for FY 2026 to prevent possible midyear budget cuts.)

States face the challenge of aligning spending with the new revenue reality in upcoming legislative sessions.

Top Fiscal Issues Facing States

The top three themes to emerge from NCSL's survey are: falling revenues, adapting to federal changes and mounting spending pressures.

Falling Revenues

Many states are projecting flat or declining revenue for the upcoming fiscal year. This could force legislators to pull back on spending and prioritize appropriations more judiciously than they have needed to in recent sessions.

Adapting to Federal Changes

The federal government made many changes over the last year to funds it sends to states, particularly in the One Big Beautifull Bill Act, also known as HR1, the sweeping domestic policy law President Donald Trump signed in July last year. Responding to those changes promises to be a prominent theme of upcoming sessions.

HR1 includes provisions that will have both short- and long-term effects on state budgets. Tax provisions in the legislation could affect states immediately depending on their level of conformity with the federal tax code. Several states have already changed the date of their static conformity to before the passage of HR1, giving them more time to determine the effects and a response, or they've decoupled from certain provisions.

HR1 also significantly changed Medicaid, SNAP and other health and human services programs. NCSL has published information about the changes, which were also frequently cited by survey respondents as top issues that legislators will be debating in upcoming sessions. Many states mentioned that health and human services departments are currently collecting information on the effects of changes and providing information ahead of 2026 sessions.

Other states have taken preliminary steps to backfill federal funding or provide flexibility to respond to changes. Some examples include:

• Connecticut set aside $500 million for the governor to use in addressing near-term impacts of federal changes.
• Nevada appropriated additional funds for its health department to address additional administrative costs related to SNAP. Nevada does not have a regular session in 2026, so lawmakers also passed a measure to temporarily assist individuals under extraordinary circumstances, including a federal government shutdown. The bill established a continuing appropriation that may be made during the interim with the approval of the board of examiners and the Interim Finance Committee, provided that the approved amount does not reduce the state general fund ending balance below 5% of total proposed general fund appropriations for government operations.
• Texas doesn't have a regular session in 2026, but when it met in 2025, the Legislature built some flexibility into its 2026-27 general appropriations act to address short-term needs. Lawmakers will address longer-term changes in the 2027 session.
• Vermont set aside surplus revenue from FY 2025 to help offset federal changes or address other changes in FY 2026 and beyond.

Spending Pressures

At the same time states expect revenue growth to slow, they face competing spending pressures that in the years ahead could lead to challenging budget choices in several areas:

Medicaid. Even before the Medicaid changes included in HR1, Medicaid costs were putting pressure on state budgets. According to the Kaiser Family Foundation, which tracks health-related policies, states face upward pressure from rate increases, increasing behavioral health needs and long-term care needs, in addition to other factors.

Health care. In addition to Medicaid costs, several states, including Alabama, Delaware, Idaho and New Jersey, noted that employee health care costs are rising. Some states mentioned health care costs for inmates as a concern; others cited rising health care premiums more broadly as a challenge.

Housing. Affordable housing and property tax cuts have been priorities for lawmakers over the last couple of years, and that trend looks likely to continue. States including Georgia, Massachusetts, New Hampshire and South Dakota said property tax relief or other strategies to tackle home affordability are likely to be debated in upcoming sessions.

Education. Several states, including Alaska, Nebraska, Pennsylvania, Vermont and Wyoming, said their legislatures are likely to address the perennial issue of K-12 funding in the coming year.

Despite largely stable fiscal conditions as states look ahead to FY 2027 budget deliberations, many can see storm clouds gathering on the horizon.

Erica MacKellar is a program principal in NCSL's Fiscal Affairs Program.