The incoming Trump administration and Republicans’ likely takeover of Congress carries implications for state and local budgets, with the potential for sweeping change to U.S. tax, economic and trade policy.
Here are a few federal policy areas state budget experts will be watching after President-elect Trump takes office.
Tariff hikes
Trump has made taxing imports the cornerstone of his economic plan. He has proposed 60% duties on Chinese goods and up to 20% duties on all other imports, arguing that sky-high tariffs would boost the U.S. economy and help fund the federal government.
“What he is proposing is not a tariff increase. It would be a fundamental change in American tax and trade policy,” said Richard Auxier, a principal policy associate in the Urban-Brookings Tax Policy Center, a joint venture between two think tanks.
Trump’s tariff plan would drive up the price of foreign-made goods and likely the price of products made in America with foreign components.
Higher prices for certain goods could boost sales tax collections. But the dramatic shift in trade policy could also hurt swathes of the U.S. economy, slowing economic growth and state revenues overall.
Trump’s proposed tariffs would hit manufacturing hubs in the Midwest and South particularly hard, Auxier’s team estimates. If China and other nations retaliate by hiking tariffs on U.S. goods, exporters — including Iowa farmers and Texas oilmen — could find it harder to sell their products overseas.
Tax cuts
Republicans in Congress are mobilizing to extend a $4.6 trillion tax cut package enacted during Trump’s first term and potentially to add new cuts Trump proposed on the campaign trail, such as reducing the corporate income tax rate and eliminating taxes on tips, Social Security income and overtime pay.
Extending an existing federal law won’t affect state budgets much, tax policy experts say. But additional income tax breaks could lower state tax collections.
“Should any of these sources of income be carved out, they would automatically flow through to most state income tax codes unless the states expressly decouple,” said Jared Walczak, vice president of state projects at the Tax Foundation, a free market think tank.
Most states already exempt or partially exempt Social Security income from taxation, he said.
Spending cuts
Trump’s tariff plan will not raise enough revenue to pay for all the tax cuts he’s floated, according to a Tax Foundation analysis.
State leaders could be left scrambling if Congress opts to fund tax relief by cutting funding for education, transportation or Medicaid — money states use to fund schools, build roads and provide health care to low-income people.
“One area that we’re particularly focused on, when it comes to state governments, is Medicaid,” said Eric Kim, head of the U.S. States ratings team at Fitch Ratings, a global credit rating agency.
The first Trump administration let states accept Medicaid dollars as a block grant. None chose to do so, according to health policy nonprofit KFF.
It’s not clear if the new administration will make overhauling Medicaid a priority, Kim said. But converting Medicaid from an entitlement to a block grant would mean less money for states, along with more flexibility to run their Medicaid programs.
Stock market gains
Stocks have soared and the dollar has strengthened since Election Day, as investors bet that Trump’s agenda will result in economic growth, deregulation and more government spending, the New York Times reported last week.
Not all Wall Street analysts are cheering. Some worry Trump’s economic plans could boost inflation and add to the national debt.
Still, a prolonged market rally could boost revenues in states that rely on taxing capital gains, such as two blue states Trump routinely criticized on the campaign trail.
Stock market gains, Auxier noted, are “great for California and New York.”