State lawmakers are bracing for federal tariffs, spending cuts and layoffs to potentially slow economic growth and shrink revenue collections, leaving them with less money than expected to pay for schools, health care and other services in the coming year.
To prepare, lawmakers in some states are reining in spending and setting aside extra cash in their budgets for Fiscal Year 2026, which in most states begins July 1. State leaders say they are also prepared to reconvene later this year to rewrite spending plans if necessary.
“We can only budget to where we’re at now, which is what we’ve done,” Colorado Senate Majority Leader Robert Rodriguez (D) said.
If things change — say, if Congress slashes health care funding — lawmakers may have to meet in a special session. “We have to cross that bridge when we get to it,” he said.
Lawmakers in 11 states have already passed a FY 2026 budget, according to the National Conference of State Legislatures. Most legislatures will pass budgets and adjourn by the end of May.
So far, lawmakers have taken modest steps to shore up spending plans or adopted a wait-and-see approach, according to experts who follow state fiscal trends.
“States are, by and large, balancing their budgets based on current conditions while monitoring conditions at the federal level,” said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers, a membership group based in Washington, D.C.
States in recent years have built up massive savings that will cushion them in a downturn. The economy continues to grow, at least for now. And budget writers are divided on how much they need to worry about President Trump’s trade wars and federal downsizing.
“On the Republican side, we see the tariffs as a negotiating tactic by President Trump, who is a skilled negotiator, that will eventually level the playing field and remove a lot of the trade balances that hurt the U.S.,” Arizona Senate Appropriations Chair John Kavanagh (R) said.
He said Trump’s strategy will improve the United States’ trading position. “That will not cause a recession, but will bring us into prosperity,” he said.
Federal policy moves by Trump and the Republican-led U.S. Congress could threaten state budget stability in several ways.
Since Trump on April 2 aggressively hiked taxes on imports, stock prices have gyrated, oil prices have dropped and Wall Street analysts have increased the odds of a near-term recession. Mass federal layoffs, grant freezes and cancellations also are rippling through the economy, driving up unemployment in regions home to federal workers, contractors and grantees.
The Trump administration has canceled or frozen (and in some cases un-frozen) billions of grant dollars states were using to fund after-school programs, public health agencies, disaster relief and other services. Democratic attorneys general have sued to stop the administration from withholding funds promised to their states.
Republican congressional leaders now are vowing to slash federal spending by at least $1.5 trillion over the next decade. Experts say that target will be hard to reach without gutting Medicaid, the public health insurance program for low-income people funded jointly by states and the federal government.
The future of all these policy actions is uncertain, as is their potential impact on state finances and the U.S. economy.
Lawmakers in states where budget talks have ended or are wrapping up say they are spending conservatively and in some cases trying to set money aside in case the economy tanks or Congress cuts funding for a crucial program.
Colorado lawmakers are planning to reduce spending on transportation and some social programs and tweak general fund transfers they seek to close an over $1 billion deficit. Legislative leaders also have proposed setting aside $4 million to help the governor’s office fight federal funding cuts and legal challenges.
In the budget bill passed in Idaho, lawmakers kept spending growth as low as possible and left unspent more than $800 million in expected FY 2026 and FY 2027 revenue, which is double the usual amount, House Appropriations Chair Wendy Horman (R) said.
“We absolutely guarded for economic uncertainty, whether that’s a recession, whether that’s a limiting of [federal] funding streams, whatever that might be,” she said. “We had a very conservative budget year to account for those uncertainties.”
In Maryland, lawmakers raised taxes by about $1.6 billion and cut spending by $2.3 billion to close a deficit that widened as the session progressed and federal layoffs shook the state economy. About 7% of Marylanders worked for the federal government in January, according to the Economic Policy Institute, a left-leaning think tank based in Washington, D.C.
“The Trump Administration’s actions were a cloud over the entirety of not just the budget discussion this year in Maryland, but the entire legislative policy discussion, on basically every topic,” Maryland House Majority Leader David Moon (D) said.
The budget bill now on Gov. Wes Moore’s (D) desk sets aside some extra money to help the state manage future harm to the budget, Moon said. Lawmakers also created a committee to monitor changes to federal funding, policies and regulations.
Moon, who serves on the new committee, said the potential hits to Maryland’s budget from federal actions are coming so fast they are difficult to track.
“It’s an avalanche,” he said. “And it’s really coming so fast that just auditing and cataloguing what the problems are is a very large undertaking.”
In Virginia, lawmakers created an interim committee to assess ways to support laid-off federal workers, bolster the state economy and address federal funding cuts. And a budget bill on Gov. Glenn Youngkin’s (R) desk would automatically trigger a special session if federal tax changes or funding cuts lower state revenue by a certain amount, said Virginia Del. David Bulova (D), chair of the interim committee.
“Right now, we are in pretty good fiscal shape,” Bulova said. “We have been anticipating, quite honestly, a recession for the last couple of years, and so we have engaged in very conservative budgeting, and I think that’s paid off.”
Bulova said the interim committee plans to complete a set of recommendations by Labor Day, so lawmakers can have a sense of how federal actions are impacting the state budget and how they can help communities hurt by federal layoffs and spending cuts.
“I have no earthly idea whether we can wait until the 2026 session, or whether or not to have a special session,” he said. “But we do want to be prepared with the recommendations sooner rather than later.”