State lawmakers heading into budget negotiations next year will start tackling the looming federal funding cuts enacted as part of the One Big Beautiful Bill Act.

"So far it's been different analyses and estimations of the impact, versus states announcing how they're going to handle the changes," said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers. "As states start to consider their fiscal 2027 budgets .... we'll start to see more discussions of how states are going to handle the changes on a federal level."

The options are few and well-known: raise revenue, cut spending or some combination of the two.

Sigritz made the comments Wednesday during a panel on the impact of federal funds on financing at the Government Finance Officers Association's virtual Mini Muni conference.

The most immediate OBBBA impact starting next year will be on states that need to revamp their individual income tax codes to conform with federal tax changes like new personal deductions and a higher federal state and local tax deduction. Conforming to federal changes will reduce revenues for most states, some significantly, according to Sigritz. Colorado, for example, is set to lose $1 billion under the tax code changes, he said.

"That's the first decision point for states, then they'll be getting more into the Medicaid changes ... and shifts in [Supplemental Nutrition Assistance Program] where states will have to pick up some of that," he said.

The spending cuts and reforms to Medicaid and SNAP will be phased in over through 2028, giving states some breathing room, but most will start preparing in budget negotiations early next year.

Federal Medicaid cuts will total $911 billion over the decade across the states, according to a KFF analysis, roughly $82 billion per year to states over the next 10 years. The Congressional Budget Office, in estimating OBBBA's cost of some provisions, assumed that states would replace half of reduced federal funds with their own money, according to KFF.

On average, states will have to spend two to three times more of their budgets on SNAP, with a median increase of about 202%, according to an analysis from Georgetown Law's Center on Poverty and Inequality.

Shifting a share of SNAP's expenditures to the states — which formerly was covered entirely by the federal government — will equal around $12 billion annually, based on 2024 numbers, plus another $3.5 billion in increased administrative costs, according to Federal Funds Information for States.

The first Medicaid changes, which are eligibility checks, will take effect by December 2026. New Medicaid work requirements and SNAP changes will take effect by January 2027. In fiscal 2028, Medicaid provider taxes will be phased down in so-called expansion states as well as state-directed payments.

The cuts come as the latest end-of-year revenue numbers from NASBO show states largely saw a third consecutive year of slow growth in tax collections in fiscal 2025.

"States are already experiencing tighter state budget conditions," Sigritz said. "They're having to manage expectations, and prioritize spending, as there's not enough money to go around," he said. "There are a number of states where spending demands are exceeding revenue growth so that's creating some long-term challenges," he said. "So states will have to balance all these competing things going on at the same time."

Local governments will also start to grapple with the looming cuts, said Timothy Ewell, chief assistant county administrator in Contra Costa County, Cali., and a member of the GFOA's debt committee.

"When we take stock of impacts of HR 1 [OBBBA] we have pretty massive exposure and very unique exposure compared to others," Ewell said. "We're well within in the hundreds of millions of dollars just talking about things like SNAP and Medicaid impacts," Ewell said. "We're still, like many others, trying to get a sense of the financial impacts and some of it depends on how the state rolls it downhill."

OBBBA has ushered in a "generational change in the relationship between local governments, states and the federal government," Ewell said.

Even after future turnovers in the presidential administration and Congress, it will be difficult to restore federal funding, he said. "So states and local governments need to think about in the short- and medium-term how we're going to be resilient and accept the realignment that's happening."