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President Trump Signs Tax and Spending Bill:

What It Means for State Governments

By Jamal (Jay) Nelson, CSG National Director of Federal Affairs

On July 4th, President Trump signed H.R. 1, informally known as the “One Big Beautiful Bill,” into law. This significant tax and spending package, passed through the reconciliation process, will profoundly reshape federal policy across numerous sectors. Its enactment carries direct and far-reaching implications for state and local governments, impacting everything from their budgets and health care systems to energy initiatives and immigration policies.

Here’s a breakdown of key provisions in the newly signed law and their anticipated effects on states:

1. Fiscal Landscape & Tax Policy

  • Permanent Tax Cuts: The law makes permanent many of the individual and business tax cuts from the 2017 Tax Cuts and Jobs Act. While federal, these changes can influence state tax revenues and economic activity.
  • SALT Deduction Cap: A key change for many states is the temporary increase of the State and Local Tax (SALT) deduction cap to $40,000 for five years. This is a significant issue for states, particularly high-tax “blue states.” This offers some relief to taxpayers in high-tax states, but its limited duration means states will continue to navigate the long-term implications for their residents and revenue strategies.
  • New Tax Deductions: The bill introduces new federal tax deductions for qualified tips, overtime compensation, and interest payments on auto loans for U.S.-assembled vehicles, as well as enhanced deductions for seniors.
  • “Trump Accounts”: The law creates new tax-advantaged “Trump accounts” for individuals under 18, structured like IRAs, which could influence personal savings and investment patterns.

2. Health Care & Medicaid Overhaul

  • Medicaid Funding Shifts: The law includes provisions that will limit federal funding for Medicaid and food assistance benefits. This will place significant fiscal pressure on states, as Medicaid is a joint federal-state program and often the largest expenditure in state budgets.
  • Provider Tax Modifications: It modifies the safe harbor threshold for state provider taxes under Medicaid, potentially reducing the amount of federal matching funds states can draw down, thereby increasing state costs. It will incrementally lower provider taxes from 6% to 3.5% by 2032
  • Rural Hospital Grants: A notable inclusion is $50 billion in mandatory spending over five years for state grants to rural hospitals. This funding aims to support health care providers, chronic disease management, and technology training in rural areas, offering some relief among broader Medicaid changes.

3. Energy & Environmental Policy

  • Clean Energy Credit Rollbacks: The law rolls back or phases out key clean energy tax credits enacted in the 2022 climate law, particularly for wind and solar projects and electric vehicles. This will directly impact state-level clean energy initiatives and investments, potentially hindering progress on climate goals and affecting energy costs.
  • Increased Fossil Fuel Leasing: It mandates the Interior Department to resume quarterly onshore oil and gas lease sales and offer significant acreage for coal leases in the western U.S., potentially increasing fossil fuel production on federal lands within states.
  • Rescission of Clean Energy Funds: The bill rescinds unobligated funds from various Energy Department programs designed to deploy new clean technologies, reduce emissions, and support environmental justice projects. This will reduce federal support for state and local efforts in these areas.

4. Immigration & Border Security

  • Increased Enforcement Funding: The law provides hundreds of billions of dollars for border security and immigration enforcement, including increased funding for U.S. Immigration and Customs Enforcement (ICE) and detention capacity.
  • State Border Security Reinforcement Fund: A new $10 billion fund is established for grants to states and local governments to support border security activities, such as installing fences, detecting and transferring unauthorized immigrants who have committed crimes, and combating illicit substances. While this provides federal resources, the bill explicitly states it does not grant states authority to conduct immigration enforcement activities reserved for the federal government.
  • New Immigration Fees: The law establishes new mandatory immigration-related fees, which will generate revenue to offset spending in this area.

5. Other Key Provisions

  • AI Moratorium Removed: In a significant win for states, the Senate omitted the controversial provision that would have banned states from regulating Artificial Intelligence (AI) if they wanted access to certain federal funds. This preserves states’ vital authority to advance AI innovations and protect their residents. The provision drew strong opposition from a bipartisan coalition of state and local organizations, 40 state attorneys general, and 17 Republican governors.
  • SNAP Cost-Share: Beginning in fiscal year 2028, states will be responsible for funding a percentage of SNAP benefits based on their payment error rates, adding a new fiscal responsibility.
  • Student Loan Changes: The new law modifies federal student loan repayment plans and eligibility, with potential impacts on state residents and higher education institutions. Notable changes include:
    • Pell Grant Eligibility Tightened: The bill modifies Pell Grant eligibility, though it does not alter the maximum award amount, which remains subject to annual congressional determination. Beginning in July 2026, the new legislation will impose a limit: students whose Student Aid Index (SAI) is double the maximum Pell Grant or higher will no longer be eligible to receive any Pell funds. The SAI is a crucial figure derived from the Free Application for Federal Student Aid (FAFSA), utilized by the Department of Education and academic institutions to determine a student’s overall financial aid eligibility. This change could impact a substantial number of students who previously qualified for some level of Pell Grant assistance.
    • Workforce Training Pell Grants: A new program will extend Pell Grant eligibility to students in community college workforce training programs, effective July 1, 2026.
    • New Borrowing Caps for Graduate/Professional Students: Starting July 1, 2026, federal loan limits for graduate students will be set at $20,500 annually, and for professional students (e.g., medical or law school) at $50,000 annually.

The “One Big Beautiful Bill” marks a monumental shift in federal policy, fundamentally reshaping the federal-state relationship. Its sweeping provisions across tax cuts, Medicaid, immigration, and social safety net spending will create profound fiscal, programmatic, and regulatory impacts for state and local governments. States will now face significant budgetary pressures, the need to adapt to new programmatic requirements, and the challenge of responding to drastically shifted federal priorities.