States are drafting fiscal year (FY) 2027 budgets in a far tougher economic environment than just a few years ago. After a post‑pandemic revenue surge, growth has slowed sharply and federal policy changes—especially the One Big Beautiful Bill Act (OBBBA) and tariffs—are reshaping state revenue baselines. 

For many states, the biggest question is whether—and how—to conform to OBBBA’s tax changes or offset its Medicaid and SNAP cuts. Plus, states face a related challenge: Is now the time to redesign tax systems to better manage policy and economic shocks?

Revenue Growth: From Surge to Slowdown

Revenue forecasts from 31 states suggest that the median state now projects nominal FY 2027 tax growth of only 2.3 percent, compared with 4.1 percent in the most recent completed fiscal year, FY 2025 (see figures). These updated forecasts incorporate new federal policies, including OBBBA, recent tariff developments, and federal workforce cuts, among other changes.

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OBBBA Conformity: The High‑Stakes Tax Question

OBBBA is forcing state legislatures to decide how closely to track the federal code. A few examples demonstrate the challenges that all states are facing.

New York projects that the law’s tax changes and cuts to health care and nutrition would raise state costs by about $800 million in the remainder of FY 2026 and $3.4 billion in FY 2027, while expanded expense provisions will erode corporate franchise tax revenues. 

Arizona estimates that full conformity to federal tax law would reduce General Fund revenue by roughly $438 million in FY 2026 and $336 million in FY 2027. That’s on top of about $111 million in SNAP and Medicaid administrative expenses. 

Colorado’s December forecast warns that OBBBA-related changes to individual and corporate deductions are contributing to revenue losses of more than $1 billion over two years and are expected to leave General Fund reserves below the state’s statutory 15 percent target. 

Massachusetts projects a $664 million revenue hit from OBBBA in FY 2026, and $282 million in FY 2027. These are driven largely by automatic conformity and the higher federal SALT cap that weakens participation in the state’s pass‑through‑entity workaround.

Other states have already moved to blunt OBBBA’s impact: Maryland has temporarily decoupled from three federal business‑income provisions, but still expects near‑term corporate tax losses. State forecasters note roughly one in six recent federal layoffs happened in Maryland. 

Corporate Taxes, Jobs, and Trade: New Pressure Points

Corporate income taxes are under strain. Kansas reports that C‑corporation estimated payments have lagged prior‑year levels for most of 2025, citing OBBBA’s generous expensing provisions as key drivers of lower revenues. Oregon’s new forecast similarly notes that personal income and corporate taxes remain highly sensitive to equity markets and capital‑gains‑heavy taxpayer behavior. 

States with large federal workforces, including Colorado, Maryland, Virginia, and Washington, are factoring the effects of federal job cuts into their revenue outlooks, with Virginia’s latest consensus projecting weaker withholding and sales taxes and Washington’s forecasters warning that extended hiring freezes and program cuts could weigh on personal income and consumer spending.

Even Hawaii is tracking tariffs, federal workforce reductions, changes in federal transfers, and interest rates, underscoring that tourism reliant states are not immune to federal austerity and trade tensions.

A Cooler Economy, Layered With Tariffs

National forecasters expect real GDP growth to slow from 2.8 percent in 2024 to roughly 2.0 percent in 2025 and 2026, and 1.9 percent in 2027, as job gains downshift and unemployment drifts into the mid‑4 percent range. 

Tariff policy is adding new risks for states. On many basic goods, average tariff rates have reached as high as 35 to 40 percent, squeezing household budgets and certain sectors, like construction and auto manufacturing. Although some sectors may be buoyed by artificial intelligence, the long-term effects of these and data center investments are unclear. 

For state budgets, this means slower income growth, more cautious consumer spending, and volatile corporate profits that directly feed into personal, corporate, and sales tax collections.

The FY 2027 Fight: Low Growth, High Stakes

States are budgeting amid overlapping threats from federal policy and economic uncertainty, while still feeling political pressures to cut taxes and expand services. 

Unlike previous years, states face a new central question in the FY 2027 debate: Not how to spend windfalls, but how to build enough resilience into state tax codes and budget reserves to ride out federal and economic shocks.