Republican-Led States Navigate Budget Challenges from Federal and State Tax Policies

By Natalie Fertig

*Published: 2026-03-25*

Indiana has temporarily adopted federal tax cuts on tips and overtime, a move projected to reduce state tax revenue by $251 million in 2026, according to an analysis by the left-leaning Institute on Taxation and Economic Policy (ITEP). Full adoption of the federal tax code could reduce Arizona's revenue by $381 million in 2026, based on a 2025 analysis by the state's Joint Legislative Budget Committee. Arizona Republican Senate Appropriations Committee Chair John Kavanagh said he plans to address the shortfall by drawing on surplus funds and cutting agency budgets by up to 5 percent.

Changes to federal requirements for the Supplemental Nutrition Assistance Program (SNAP) and Medicaid are prompting additional state spending. Several Republican-led states, including Oklahoma, are allocating funds for technology upgrades and more staff to implement new Medicaid work requirements and enhance SNAP payment accuracy. Failure to invest now could lead to penalties under H.R. 1 for states with high overpayment or underpayment rates, potentially costing hundreds of millions in future years, according to Oklahoma Republican House Appropriations and Budget Chair Trey Caldwell.

“We’re going to take the first hit in [fiscal] ‘27,” Caldwell said, referring to a nearly $26 million increase requested by the Oklahoma Human Services agency for SNAP as “another direct cost of H.R.1.” Oklahoma, however, reported strong revenue performance, with general revenue fund collections exceeding projections at $8.7 billion for fiscal year 2025 and total taxes reaching $13.56 billion in fiscal year 2024, despite a dip from prior years. The state enacted no structural deficit for fiscal year 2025 and recently cut its top income tax rate to 4.5 percent for 2026.

Republican-led states are considering various budget adjustments, including cuts or freezes to state agencies, higher education, family programs, and disability services. In Missouri, Republican House Budget Committee Chair Dirk Deaton proposed a roughly $50 million reduction to child care enhancements during a March 9 committee hearing.

“We’re faced with hard decisions,” Deaton said. “It is what it is.”

Missouri lawmakers are also discussing reductions to addiction services and programs for people with disabilities. Republican Gov. Mike Kehoe signed a bill this month allocating $132 million in the 2026 budget for H.R. 1 implementation and has requested additional millions for 2027. Missouri phased its top income tax rate down to 5.1 percent following the 2017 federal Tax Cuts and Jobs Act (TCJA).

“Some of those [Medicaid] mandates, or some of those requirements, are going to force our hand,” said Missouri GOP Rep. John Simmons, noting the ongoing budget process. Simmons opposes proposed cuts to disability services and foster care but said “certain areas are gonna have to take a haircut.”

The Iowa House passed a bill last week imposing a one-time tax increase on health maintenance organizations (HMOs) to address a projected $90 million shortfall in the state's Medicaid budget for fiscal year 2026. “A lot of [the shortfall] has been through H.R.1 not taxing overtime, not taxing tips,” said Republican lobbyist Phil Jeneary, executive director of Iowans for Affordable Healthcare, a nonpartisan group opposing the tax. The plan also includes transferring $347 million from a state surplus fund. Iowa reduced its top income tax rate from 5.7 percent to a flat 3.8 percent in recent years.

Jeneary described the legislature as “in between a rock and a hard place, really, because they don’t want to raise taxes but they also need to balance the budget.” The proposal drew bipartisan opposition, including from some Republicans who voted against it, as well as voters and patient groups.

“Many Iowans rely on HMO plans, and I saw this tax as the wrong approach at the wrong time,” Iowa GOP Rep. Mark Cisneros, who opposed the bill, said in a statement. “I believe solutions should be considered by looking at the entire state budget as a whole, rather than addressing issues in pieces. Raising taxes is often not the answer.”

More than 17 Republican-led states cut income tax rates between 2021 and 2023, following the 2017 TCJA, which had a net state revenue impact of less than 5 percent according to the Urban Institute. Many Republican legislators express support for conservative tax policies but cite timing challenges amid state deficits from prior cuts and revenues below expectations in some cases.

When Idaho approved $450 million in state tax cuts in 2025, Republican Sen. C. Scott Guthrie cautioned colleagues about similar federal plans. “The right answer for a conservative is, ‘yeah, I love tax cuts. I always vote for tax cuts, whatever,’” Guthrie said. “That’s all great, but still, there’s got to be some balance to it.”

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