How Will Federal Funding Cuts Impact State Budgets? 

Fewer federal dollars for states could put some states in a difficult position: either cut services or raise taxes.

July’s budget bill cut almost a trillion dollars of federal Medicaid spending over a decade, according to the Congressional Budget Office. And in June, the Trump administration said it was freezing almost $7 billion in federal education funds. Although these funds were released a few weeks later, uncertainty arose over whether schools would be able to meet the needs of kids around the country.

One out of every three dollars spent by states in recent years has come from the federal government. Of course, state budgets are no monolith. For example, while Louisiana relies on federal funding for half of its spending, federal funding makes up less than a quarter of Connecticut’s budget. (The remainder of state money comes from general state funds, filled primarily by state tax revenue and other state sources like specialized funds, rainy day funds, and bonds.)

Over half of all federal funding to states supports Medicaid, which provides health care coverage to low-income individuals. In 2024, states spent $914 billion on Medicaid; $588 billion of that, or 64 percent, came from the federal government. States also spent $845 billion on combined pre-K–12 and higher education, with $136 billion — around 13 percent — coming from the federal government. Although the bulk of education funding comes from states themselves, the U.S. Department of Education helps support K–12 schools in low-income districts, Head Start preschool for low-income families, Pell Grants for low-income students to attend college, and special education programs for students with disabilities.

Unique fiscal provisions found in every state constitution will play a role in how states are affected by federal funding cuts and how they can work around budget shortfalls.

“Unlike the federal Constitution, virtually all state constitutions give detailed attention to questions of public finance,” writes Columbia Law School Professor Richard Briffault, an expert in state and local government whose scholarship has focused on state constitutional fiscal provisions. “State constitutions limit spending, mandate certain types of spending, constrain taxation and debt, and require special procedures for enacting a budget.”

Every state except Vermont is required either by statute or by state constitutional provision to balance its budget. Put simply, these provisions prohibit states from spending more money than they collect in a fiscal year. “So if states want to make up for lost money,” Briffault said in an interview with State Court Report last month, “we will likely be seeing states raising taxes or cutting services.”

But, Briffault noted during the interview, “states that have caps on raising money, like constitutional limits on raising taxes or borrowing, will find it harder” to fill gaps left by lost federal funds.

In 16 states, a supermajority of the legislature is required to approve all or some tax increases. According to the National Council of State Legislatures, “these requirements dictate either a three-fifths, two-thirds, or three-fourths majority vote in both chambers to increase or impose a new tax.” Most state constitutions also limit the ability of the state to borrow money to make up for budget shortfalls. The structure of these limitations differs from state to state: Some bar state debt outright, others cap debt, and many require approval of new debts by voters, a supermajority of the legislature, or both.

To get around constitutional constraints on their ability to raise money, Briffault has written, states frequently rely on “slippery budgetary devices” and “fiscal manipulations.” These include selling bonds backed by a specific revenue source rather than by the state fisc, imposing fees for use of public services, shifting revenues or expenses between fiscal periods, and more.

But clever accounting might not help states facing gaps in funding from lost federal dollars. “I’m skeptical that states can creatively get around these kinds of federal cuts,” Briffault told State Court Report. “Maybe in the first year some states could defer expenses, but it would be hard to use creative workarounds in the long run.” He noted that these budgetary tools “are most successful where there is infrastructure involved.” That’s because new infrastructure can be financed by the revenue it generates, he explains. The state can borrow funds to finance infrastructure projects and pledge the revenue from the project to pay off the bonds — a scheme that is not generally applicable to spending on social services.

The loss of federal funding in areas like Medicaid or education, then, is likely to result in cuts to services in many states. In legal filings, dozens of state officials have attested to the impact of a loss of federal dollars on their ability to provide critical public services, including education, health care, transportation, and food assistance. Such cuts make it difficult for states to fulfill their “constitutional duty to serve [their] residents effectively,” one official said.

These state constitutional obligations to provide certain services add a layer of complexity to the problem. For example, substantial reductions in health care coverage for low-income individuals may run afoul of certain states’ constitutional guarantees regarding health care. Courts in at least two states — New York and North Carolina — have recognized that their constitutions require some level of state health care support for those in need. And every state constitution guarantees a public education system. Many further require states to provide special education or maintain colleges and universities, according to the Education Commission of the States. Some state courts have found that educational provisions mandate certain per-pupil expenditures and have struck down school financing schemes that created inequities between districts, establishing duties that may be harder to meet without federal funding to low-income school districts.

“It often seems there is a structural gap — indeed, a chasm — between what the public wants from government and what it is willing to pay for, a gap that produces constitutional provisions that make it hard for elected officials to get the public to pay for the services that the public demands,” Briffault writes. Federal cuts squeezing state budgets in the coming years are likely to highlight that gap.

Kathrina Szymborski Wolfkot is the managing editor of State Court Report and a senior counsel in the Judiciary Program at the Brennan Center for Justice.

Dylan Erikson is a student at NYU Law School. He previously participated in the Brennan Center’s Public Policy Advocacy Clinic.

Suggested Citation: Kathrina Szymborski Wolfkot & Dylan Erikson, Federal Funding Cuts Undermine State Constitution Obligations, Sᴛᴀᴛᴇ Cᴏᴜʀᴛ Rᴇᴘᴏʀᴛ (Sep. 09, 2025), https://statecourtreport.org/our-work/analysis-opinion/federal-funding-cuts-undermine-state-constitution-obligations