Fiscal Year 2026 is set to be a lean one for many states, as revenues stabilize after a Covid-era boom and lawmakers reckon with recent tax cuts and spending increases that now look less affordable.
Colorado, Illinois, Maryland, Nebraska and Washington are among the states that will need to draw down savings, cut spending, or raise revenue to balance their budgets next year. Tax collections are failing to keep up with the rising cost of government programs such as schools, health care and child care subsidies.
In still more states, such as California, budget analysts warn there will be little room for new spending as long-term deficits loom.
“The expectation is that Fiscal 2026 budgets will be much harder to balance than Fiscal 2025,” said Geoff Buswick, managing director and sector leader for the U.S. Public Finance Group at S&P Global, a credit rating agency. “And I think that’s across the board.”
The budget outlook could worsen if President-elect Trump makes good on his campaign promise to slash federal spending. Fiscal policy experts are watching to see if Trump and the incoming Republican-led Congress target Medicaid, the health insurance program for low-income people jointly funded by states and the federal government.
Rising Medicaid costs are a perennial pain point for state budgets, said Eric Kim, head of the U.S. states rating team at Fitch Ratings, a credit rating agency. Next year, he said, “you’ve got the complication, also, of a new administration coming into Washington.”
Most state legislatures must pass budgets next year, according to the National Association of State Budget Officers, a membership group. Thirty-one states must enact one-year budgets for FY 2026. Sixteen must enact two-year budgets for FY 2026 and 2027. FY 2026 starts July 1 in most states.
The U.S. economy is still growing and the national unemployment rate remains low, at about 4%. But state revenue growth is slowing as economic growth slows, recent state income tax cuts kick in, and consumers pull back on expenditures as they spend down Covid-era savings and feel the pinch from inflation.
Meanwhile, higher-than-expected Medicaid enrollments, a spike in health care costs, rising education costs, and state workers’ pay and benefits are applying pressure to state budgets.
Maryland lawmakers face a particularly daunting budget gap.
State fiscal analysts project a $299 million shortfall this fiscal year and a $2.75 billion shortfall in FY 2026. They also forecast a long-term deficit that could widen to $5.9 billion by 2030. Maryland leaders approved a $25.9 billion general fund budget for this fiscal year.
The state is on track to collect only 84% of the money needed to fund ongoing spending in 2030, according to the Department of Legislative Services, which advises the legislature. That’s a greater deficit than Maryland experienced during the Great Recession.
“This budget problem is not being driven by a recession,” David Romans, a fiscal policy analyst at the Department of Legislative Services, told lawmakers this month. “It’s being driven by a somewhat stagnant economy and by our spending ambitions.”
A landmark 2021 education funding law is a major driver of the state’s budget gap. The Blueprint for Maryland’s Future raised teacher pay, expanded public pre-kindergarten, and increased per-pupil funding and funding for schools with a high share of low-income students.
Lawmakers created a special fund to cover the law’s costs, but it will be exhausted by the end of FY 2027, Romans told lawmakers.
Senate President Bill Ferguson (D) is vowing to consider all options for fixing the deficit while protecting school funding and other policy priorities.
“Everything is on the table,” Ferguson said in a statement provided to media outlets. “Where we can, we will make cuts and adjustments to existing programs that are not achieving outcomes. We also will consider altering revenue policies so long as those changes keep our state competitive with the surrounding region.”
Washington State lawmakers also must address a significant shortfall next year.
Gov. Jay Inslee’s (D) administration projects a $10 billion-$12 billion shortfall over four and a half years, starting this fiscal year through the end of FY 2029. Lawmakers must close the entire gap in their biennial budget for FY 2026 and 2027.
Inslee’s team has ordered state agencies to start looking at ways to save money, such as by delaying or eliminating programs and by freezing hiring.
Washington’s shortfall is driven by lower-than-previously-forecast tax collections, the rising cost of programs, and an increase in the number of people receiving state services, said Hayden Mackley, deputy communications director for the state Office of Financial Management.
“Some of the larger [enrollment] increases are in state-funded pre-kindergarten and child care programs,” Mackley said in an email. Washington leaders have in recent years expanded eligibility for early childhood education subsidies.
House Appropriations Committee Chair Timm Ormsby (D) said lawmakers could consider raising revenue or cutting spending to fix the budget shortfall, but it’s too soon to say what solutions they’ll focus on.
“I do not have a sense of where folks are going to be,” Ormsby said. “That’s why it’s worth showing up every day to find out.”
In some states, the budget outlook is positive for FY 2026, but deficits emerge in future years.
Florida’s Office of Economic and Demographic Research, the legislature’s research arm, estimates the state will enjoy a $2 billion surplus next fiscal year before facing a $2.8 billion deficit in FY 2027 and a $7 billion deficit in FY 2028. Florida leaders approved a $48.6 billion general fund budget for this fiscal year.
Increased spending on education — both public schools and recently expanded vouchers for private education — and Medicaid fuel the out-year deficits, according to the Office of Economic and Demographic Research.
Natural disasters are another big expense. Florida must pay an estimated $541 million over the next three years in matching funds for federal disaster relief grants associated with past hurricanes — not including Helene and Milton, two major storms that hit the state this year.
“The biggest part of that $541 million is about $307 million for [Hurricane] Ian,” Amy Baker, coordinator for the Office of Economic and Demographic Research, told the Joint Legislative Budget Commission in September. “Idalia is still in there as a big cost driver, and Nicole is still in there as a big cost driver, and Michael is still in there.”
Florida and Maryland are two of only 16 states that forecast long-term revenue and spending trends, as well as identify what’s behind them, said Josh Goodman, a senior officer at the Pew Charitable Trusts who studies state budgets.
Goodman cautioned that states that don’t require such a thorough forecast may also face long-term deficits. “There might be more states where — things would look just as negative in those states as well, if they were doing the same kind of analysis,” he said.
States still have unusually large sums stashed in their emergency savings accounts, a legacy of the Covid-era revenue boom. Many also have other surplus funds they can tap to help address budget problems next year.
But rating agency analysts and fiscal policy experts advise lawmakers not to rely solely on savings to close long-term funding gaps.
“If you use your reserves this year, you’re just going to have the same problem next year, or in two years,” Goodman said. “And you won’t have the reserves once there is a recession.”