The federal tax and budget megabill creates a new fiscal relationship between Washington and states. Pew’s Rebecca Thiess and Justin Theal explain how the new law will affect state tax revenue: 

On tax policy, the bill extends and modifies many provisions enacted during President Donald Trump’s first term in 2017. State tax codes link or “conform” to the federal code to varying degrees. For instance, nearly all states that collect personal income taxes use the federal definition for taxable income. In states that automatically conform, changes to those definitions can directly affect state revenues, increasing collections in some states and reducing them in others.

The new law shifts some of the financial responsibility of health care and food assistance to states and creates new administrative costs for agencies: 

State analyses also estimate how Medicaid and SNAP mandates will increase administrative costs, which will ramp up spending even before larger federal cost shifts arrive. The Colorado Legislative Council Staff, for example, estimates an additional $10.7 million for SNAP administration in fiscal 2027, while Wisconsin’s Legislative Fiscal Bureau pegs its cost increases at about $50 million per year.

The reduction of federal cost-sharing poses serious threats to state budgets: 

“Reduced federal funds have multiplier effects—like a stimulus in reverse,” said Matthew Knittel, director of Pennsylvania’s Independent Fiscal Office. Although near-term costs can often be absorbed with reserves or one-time adjustments, structural pressures will mount in the later years. New Mexico, for example, estimates new recurring costs related to federal Medicaid and SNAP will total about $620 million in fiscal 2027 and rise to just over $1 billion by fiscal 2029. As those obligations climb, the state’s overall bottom line shifts from a modest surplus in fiscal 2026 to a projected $2.1 billion deficit in 2029.

Stopping state subsidies to private schools

Section 529 education savings plans were created to provide tax breaks to parents who save money for their children’s college tuition. The 2017 Trump tax law drastically changed these plans so they can now be used for tuition at private K-12 schools. Miles Trinidad and Nick Johnson of the Institute on Taxation and Economic Policy explain how the 2025 federal megabill made more changes to 529 plans: 

The 2025 Trump tax law goes even further by boosting annual tuition withdrawal limits from $10,000 to $20,000 per beneficiary and expanding the definition of qualifying expenses to include unlimited spending on K-12 non-tuition costs, such as curriculum materials, books, and tutoring. Home schooling expenses also qualify now. Of the 31 states plus D.C. that provide state tax subsidies to families that use 529 accounts to pay for K-12 private schooling, all but three go a step further than the federal government in the imprudence of those subsidies.

Louisiana is among the states that go a step further than the federal government by giving parents another tax break for their initial contributions. Trinidad and Johnson explain who’s primarily benefiting from 529 plans: 

Most of the benefits of this arrangement go to the wealthiest parents, because they are the most likely to have children in private schools, their schools charge the highest tuition, they are in the highest tax brackets, and they are more likely to have the resources and financial savvy needed to participate in 529 accounts. Even when used for higher education, 529 plans are widely recognized as inequitable and relatively ineffective. Most of the benefits go to well-off families who would have been able to save for college anyway. 

The expansion of 529 plans created a new tax dodge for wealthy families: 

In states that offer deductions or credits for contributions, parents can make a contribution to a 529 account, receive the deduction or credit in exchange for their contribution, and then immediately withdraw those funds to pay for the private school expenses – minus whatever fees are charged by the private investment firms who manage 529 accounts. In this scenario, the 529 plan is not a savings vehicle at all, but rather a brief pit stop whose only purpose is to allow taxpayers to pay for their children’s private school education with pre-tax dollars.

There are ways states can reign in 529 plans, including tightly defining expenditures:

States establish in law or regulation that for purposes of state taxation, K-12 expenses from a 529 plan are non-qualifying expenditures. That means that if a taxpayer uses money in a 529 plan for K-12 spending, any profit that has been accrued while the money was in the 529 plan is subject to tax, as it would be if it were used for any other nonqualifying expenditure.

States need water infrastructure investments

The United States will need to invest $3.4 trillion over the next decade to tackle a backlog of water, stormwater and wastewater infrastructure needs, according to a new report from the Value of Water Campaign. But as Governing’s Carl Smith explains, the federal government has largely put the responsibility of tackling these water-infrastructure needs to states:

In 1981, the federal government provided more than $25 billion in capital investment for water infrastructure, almost half of the total for the year. By 2021, this had decreased to $4 billion, 7 percent of total funding. “Once upon a time, the federal government invested a majority stake in what we spend as a nation on water infrastructure,” says Emily Simonson, a senior director at the U.S. Water Alliance. “Now it’s less than 10 percent, a massive gap for future generations to cover.”

Carl notes how much of the tab states could pick up: 

State and local governments could reasonably provide about $1.5 trillion of that investment, leaving a $2 trillion gap, the authors say. That gap will increase if federal funding levels go below those currently provided by the Infrastructure Investment and Jobs Act (IIJA).

On a per-capita basis, Louisiana needs $850 in water-infrastructure investments in urban areas, the third-highest rate in the nation. Unlike most states, Louisiana’s per-capita need in urban areas exceeds the needs in rural areas. 


Turning over housekeeper to the feds

Hammond police stopped Juliana Herebia for a minor traffic violation earlier this month, but ultimately jailed her for having an expired work visa. Herebia, a housekeeper and mother of two, had her car impounded and was sent to a detention center near Opelousas. Lil Mirando of the Hammond Star reports on the reaction from locals: 

Local residents are expressing concern about local law enforcement involvement with the federal immigration sweep. Do the local city and parish governments who hire local law enforcers condone the police helping with the sweep? The vast majority of the people that are being rounded up are not criminals. They may be in the country illegally, but they have not violated any criminal law, said Hammond attorney Tom Hogan. Overstaying a visa is not a crime. It is a violation of civil law, not of criminal law.

Number of the Day

$15.48 – Average cost for a turkey in Louisiana. (Source: American Farm Bureau Federation via The Advocate)