State budgets across the country remain largely stable, but growing concern is emerging among legislatures due to recent and proposed federal spending cuts, including reductions to the federal workforce. Looking ahead to fiscal year 2026 and beyond, states face mounting uncertainty as revenue growth slows, pandemic-era federal aid phases out and the threat of significant federal budget reductions intensifies. Medicaid, a cornerstone of state funding, is facing funding cuts in current House reconciliation tax bill negotiations. This is especially troubling as states continue to contend with rising Medicaid and employee healthcare costs. With federal funding accounting for roughly one-third of state revenues, this fiscal unpredictability is prompting many states to adopt cautious budgets, allowing for mid-year adjustments, should federal policies shift or economic conditions deteriorate.

Maryland exemplifies a state bracing for these federal shifts. Entering its legislative session with a projected $3 billion budget shortfall – excluding the potential impact of Medicaid cuts – state lawmakers responded with a budget that blends spending reductions, tax increases and structural tax reforms. Similarly, Virginia is taking preemptive steps to safeguard its finances. Gov. Glenn Youngkin (R-VA) trimmed $900 million from the amended budget to add to the state’s rainy day reserve, anticipating possible economic fallout from federal workforce reductions and spending cuts. These actions reflect a broader national trend: states are leaning on reserves and adopting prudent fiscal strategies to navigate an increasingly uncertain federal funding landscape.