Filling the Gaps: State Tax Policy after the OBBBA
July 23, 2025 |
The new federal budget will cost New York State $10 billion annually. The State will have to step in.
Introduction
On Thursday, July 3rd, the U.S. House of Representatives passed the Senate’s federal budget reconciliation bill. Informally known as the “One Big Beautiful Bill Act” (OBBBA) and signed into law by President Trump on July 4th, the bill makes permanent major tax cuts enacted in 2017, adding $3.4 trillion to the U.S. federal deficit over the next ten years. The effects will include 17 million Americans losing their health insurance.
The total cost to the New York State budget will be approximately $10 billion annually, concentrated in reductions to funding for Medicaid and related health programs as well as food stamps (SNAP). Some of these funding cuts will mechanically shift program costs to the state budget; others will directly reduce funding for public programs in healthcare, education, and housing, among others. FPI estimates that federal funding reductions to the healthcare system will total $13 billion in addition to the $10 billion in cuts that directly affect the State’s budget. The most consequential of these effects will be the loss of health insurance for 1.5 million New Yorkers, the closures of hospitals across New York, and the loss of over 200,000 jobs state-wide.
This paper illustrates how the new federal budget legislation shifts the balance of responsibility for fiscal and social policy to state governments. While revenue measures are described towards the end, the argument of this paper is not primarily in support of a specific set of policy recommendations; rather, it shows the following more general conclusions: (i) the current crisis is the result of fiscally unsustainable federal tax cuts enacted in 2017 by President Trump and Congressional Republicans, the costs of which have forced unprecedented cuts to critically important federal social programs; (ii) the New York State economy has the capacity to generate enough new revenue to fill these funding gaps by simply restoring the total level of state taxation to where it stood in 2009; and (iii) filling these gaps will require a break with the recent state policy convention of only allowing tax increases on the ultra-rich, and will instead require broad-based taxation targeted at the top 5 percent of New Yorkers – households earning over $250,000.
The core of the argument that the state economy has the capacity to fill the gaps is simple: The total value (gross state product) of New York State’s economy in 2024 was $2.3 trillion, and total state revenue was $148 billion – reflecting a 6.5 percent tax burden on all state economic activity. Raising this overall tax burden by just 0.45 percentage points on all economic activity would allow the State to generate the $10 billion in new revenue.
First, however, because these tax increases ought to be understood as filling in the gaps left by the federal government, it is necessary to make sense of the federal fiscal context that has produced this strange situation.
Filling the Gaps: State Tax Policy after the OBBBA
July 23, 2025 |
The new federal budget will cost New York State $10 billion annually. The State will have to step in.
Introduction
On Thursday, July 3rd, the U.S. House of Representatives passed the Senate’s federal budget reconciliation bill. Informally known as the “One Big Beautiful Bill Act” (OBBBA) and signed into law by President Trump on July 4th, the bill makes permanent major tax cuts enacted in 2017, adding $3.4 trillion to the U.S. federal deficit over the next ten years. The effects will include 17 million Americans losing their health insurance.
The total cost to the New York State budget will be approximately $10 billion annually, concentrated in reductions to funding for Medicaid and related health programs as well as food stamps (SNAP). Some of these funding cuts will mechanically shift program costs to the state budget; others will directly reduce funding for public programs in healthcare, education, and housing, among others. FPI estimates that federal funding reductions to the healthcare system will total $13 billion in addition to the $10 billion in cuts that directly affect the State’s budget. The most consequential of these effects will be the loss of health insurance for 1.5 million New Yorkers, the closures of hospitals across New York, and the loss of over 200,000 jobs state-wide.
This paper illustrates how the new federal budget legislation shifts the balance of responsibility for fiscal and social policy to state governments. While revenue measures are described towards the end, the argument of this paper is not primarily in support of a specific set of policy recommendations; rather, it shows the following more general conclusions: (i) the current crisis is the result of fiscally unsustainable federal tax cuts enacted in 2017 by President Trump and Congressional Republicans, the costs of which have forced unprecedented cuts to critically important federal social programs; (ii) the New York State economy has the capacity to generate enough new revenue to fill these funding gaps by simply restoring the total level of state taxation to where it stood in 2009; and (iii) filling these gaps will require a break with the recent state policy convention of only allowing tax increases on the ultra-rich, and will instead require broad-based taxation targeted at the top 5 percent of New Yorkers – households earning over $250,000.
The core of the argument that the state economy has the capacity to fill the gaps is simple: The total value (gross state product) of New York State’s economy in 2024 was $2.3 trillion, and total state revenue was $148 billion – reflecting a 6.5 percent tax burden on all state economic activity. Raising this overall tax burden by just 0.45 percentage points on all economic activity would allow the State to generate the $10 billion in new revenue.
First, however, because these tax increases ought to be understood as filling in the gaps left by the federal government, it is necessary to make sense of the federal fiscal context that has produced this strange situation.