As President Trump’s new administration pushes for significant tax cuts, spending reductions, and trade tariffs, state governments are grappling with the severe fiscal stress caused by these federal policy changes. A recent report from the National Conference of State Legislatures notes that while many states expect to meet their current-year revenue forecasts, the boom times from post-pandemic stimulus are coming to an end. Governors from coast to coast say federal actions are squeezing their budgets. As one NCSL survey put it, “reducing federal spending and passing tax cuts” have become top priorities in Washington, and since “states receive a significant portion of their overall revenues from the federal government,” those changes “could lead to significant state budget shortfalls and difficult choices” by 2026. In short, a once‐expansive federal safety net is being pulled back just as state revenues slow, setting the stage for battles over schools, Medicaid, and other services.
Education funding is one high‐stakes issue. On the federal level, the Trump administration has effectively dismantled the U.S. Department of Education and its budget. In March 2025, Secretary Linda McMahon announced a reduction in force affecting nearly half of the Department’s workforce, and Trump signed an executive order to “dismantle the Education Department… to send education back to the states.” Democrats in statehouses are alarmed. As Connecticut Senate Majority Leader Bob Duff warned, “Losing federal funding for education could be disastrous for Connecticut and every other state…There’s just no way a state can cover what the federal government sends us.” In practice, that federal retreat means Washington will send billions less to Title I schools, special education grants, Pell scholarships, and other programs, and each state must decide how to fill the gap. Many districts can no longer rely on the one-time COVID-19 relief aid (ESSER) either. By May 2025, the Education Department reported that 32 states had already requested extensions of deadlines for spending down their remaining pandemic education grants. Those requests signal that schools and colleges have been holding on to every last dollar of ARP funds and that the end of those funds will leave holes to be filled.
The strain on K–12 and college budgets is already visible. In California, Governor Gavin Newsom in May 2025 unveiled a revised budget showing a $12 billion shortfall, much of it blamed on Trump’s tariffs and higher costs, and announced that to close the gap his administration would delay money for schools, claw back recent provider raises, cancel housing programs, suspend some tax credits and even tap rainy‐day reserves. In effect, California is retrenching: “Officials agreed last year to sweeping cuts to state agencies,” the budget summary notes, and now must undo prior funding boosts. By contrast, Texas, with booming oil revenues and a $24 billion surplus, has essentially done the opposite. The Texas Legislature recently approved a $338 billion budget (up about 5%) that maintains property tax cuts and increases K–12 spending by $8.5 billion. (Over 70% of Texas’s budget goes to education and health services, including Medicaid.). Still, Texas is an outlier: in most states, lawmakers are bracing for flat or falling revenue and finding only limited new funds for schools.
The squeeze is just as intense in healthcare (Medicaid) as in education. Governors note that Medicaid costs continue to rise, with increased enrollments and the introduction of new, expensive treatments, just as Congress considers scaling back federal support. State leaders were tracking a House budget blueprint that would cut roughly $880 billion from federal aid to Medicaid and related programs over the next decade. Even a “scaled‐back” GOP plan could reduce Medicaid funding by $715 billion, enough to “strip Medicaid coverage from 8.7 million people and lead to 7.6 million more uninsured” over ten years, CBO analysts say. These changes primarily rely on eliminating people from the rolls (through work requirements, paperwork, and co‐pays) since the plan keeps state matching rates fixed. The upshot: states could suddenly face millions more uninsured patients and shrieking Medicaid shortfalls. This could lead to a significant increase in the number of uninsured people and a strain on state healthcare systems. One analysis notes that Medicaid already accounts for about 56% of all federal grant dollars to states and roughly 18% of state budgets on average. Turning it into a capped block grant or per‐capita allotment would “impose a strict overall cap on federal funds,” the Center for American Progress warns, forcing states to shoulder any cost overrun and “reduce health coverage for millions” of low‐income Americans.
No wonder lawmakers are wrestling with Medicaid budgets. In Illinois, for example, officials say that more than 3.4 million residents rely on Medicaid. A new federal funding formula could leave a $815 million shortfall for the state. In Pennsylvania, which runs a perennial structural deficit, Republican leaders explicitly urged cuts to “Medical Assistance” (the state’s Medicaid program) as a top priority, proposing eligibility limits and new co‐pays on weight‐loss drugs to restrain costs. Florida’s lawmakers, conservative and controlling state government, have also explored stricter work rules and limited benefits for Medicaid. Conversely, progressive states dread any rollback: even modest cuts in federal funding would oblige them to increase state taxes or cut services.
These financial pressures are already shaping political battles at the Capitol. In many split governments, Democrats and Republicans trade blame. Republicans running state senators tend to demand austere budgets. As Pennsylvania’s Senate Majority Leader Joe Pittman put it, faced with overspending and a dwindling reserve fund, leaders must “rank priorities” between schools, transit, Medicaid and infrastructure because “we’re not going to be able to reach them all.” Texas’s new conservative budget similarly shields tax cuts and reserve balances, passing large sums along to property owners rather than expanding programs. Democrats controlling other legislatures push back: in Illinois and elsewhere, they note that primary services would collapse without new revenue. Progressive groups in Illinois have even proposed $6 billion in tax increases on higher earners to close the gap. However, Democratic leaders acknowledge the politics are authoritarian. California Democrats repeatedly asked Gov. Newsom to find revenue sources instead of cuts, but in the face of a billion‐dollar hole even some Democratic lawmakers conceded deep belt‑tightening was unavoidable. The clash is apparent: Republicans argue that budgets must be balanced without tax hikes; Democrats emphasize the severe damage to schools, hospitals, and services that would result from funding cuts.
Amid this standoff, some state officials are experimenting with progressive fixes. One avenue is new wealth taxation. Washington State’s legislature recently studied a modest 1% tax on the wealthiest households’ stocks and bonds, modeled after house taxes, and found it could raise roughly $4 billion per year for state priorities. (Washington’s outgoing Governor Jay Inslee championed the idea to fund education, housing, and tax relief for working families.) Voters in Massachusetts already approved a 4% surtax on income over $1 million in 2022, dedicating the proceeds to schools and transportation. This year Beacon Hill advocates pressed for directing about $70 million of that new “millionaires’ tax” specifically into classroom programs, arguing it was “the only way” to fund new school initiatives in a tight budget year. Similar “millionaire’s tax” or wealth tax proposals have been floated in California and elsewhere. For example, a 2022 California ballot measure would have raised an additional 1.75% on incomes above $2 million for wildfire prevention and clean cars. While Californians ultimately defeated Prop 30, the campaign illustrates how these ideas are gaining traction.
Another progressive demand is expanded federal aid, in other words, reversing some of the Trump‐era cutbacks. Congressional Democrats have revived proposals for a multi‐billion “State Rescue” fund or new Title I school grants to stabilize budgets, along with calls for higher Medicaid match rates or restoring the old Community Health Center Fund. On healthcare, advocates argue for a government “public option” that could help ease state costs. Washington State already enacted a sort of public insurance option. Under Cascade Care, every insurer in the ACA marketplace must offer a plan priced at public (Medicaid‐like) reimbursement rates. This first-of-its-kind state “public option” is designed to lower premiums and cover more people without creating a new state insurance bureaucracy. However, experts caution that such state efforts “remain limited” without federal help. (A Milbank Quarterly study of Cascade Care notes that while it is a novel idea, its impact on affordability depends on whether insurers participate.) On the national stage, some progressives have also renewed calls for a Medicare buy‐in or federal public plan to offer affordable coverage to all, which in theory would relieve states of some Medicaid and uncompensated care burdens. But with Republicans controlling Congress and the White House, these federal solutions face long odds.
In the meantime, states must balance their books. Governors in both parties have pledged to shield schools and health care “as much as possible,” but their means are shrinking. Many legislatures are reverting to one-time accounting tricks, raiding rainy-day funds (as Pennsylvania did), or delaying payments instead of implementing structural reforms. Others are tapping resistance. When New York’s leaders faced a surprise drop in revenues, Governor Hochul responded by re‐prioritizing her budget. Still, he largely spared the “fundamental programs,” instead counting on a rebound in tax receipts. In stark contrast, California announced that even K–12 funding would be deferred. Medi-cal rolled back without additional revenue. The practical upshot is that some districts and clinics may soon feel the pinch: for example, Philadelphia’s transit agency warns it will halve service by late 2025 if state funding isn’t boosted and that cuts would similarly disrupt schools and hospitals that rely on that transit network.
The situation has become a test of priorities. Will states weather the squeeze by cutting unpopular programs and hoping the economy or a future Congress helps them out? Or will they embrace progressive remedies to shore up taxes and support? Advocates for schools and health care are pushing hard for the latter. They argue that without measures such as taxing the ultra-rich and expanding federal assistance, the burden will fall on working families through larger classes, fewer services, or higher premiums. Critics argue that higher taxes hinder economic growth. With many state budgets now in deficit or on edge, these debates are playing out as full‑blown budget fights in dozens of capitols.
What is clear is that under Trump’s second term, the fiscal levers in Washington have shifted, and the laboratory of federalism is under strain. As one recent analysis warns, forcing Medicaid into a rigid block grant “would strain state budgets” and reduce coverage for the vulnerable. Meanwhile, state officials will carry the tough decisions, trimming education programs, altering Medicaid eligibility, and in some cases, seeking new revenue, until higher taxes or renewed federal largesse arrive. In this moment of tightening belts, the country is watching whether states can innovate to protect core public services or whether mounting budget gaps will force deeper cuts. Whatever the outcome, the fight over school classrooms and Medicaid rolls has become one of the most pivotal arenas in American politics, with millions of everyday voters at stake.
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