States begin the year in pretty good shape. Budgets are mostly stable, with rainy-day funds remaining near record levels. Still, some states are already seeing shortfalls — mostly blue states such as Maryland and Washington. Sales tax revenues have steadily been ticking down for months, while transportation spending has been ticking up. And there’s always the desire to address emerging issues. “Housing, housing, housing is on people’s minds,” says Jonathon Dworkin, vice president of NewDEAL, a network of Democratic officials. “It’s an issue everywhere.”
The fiscal picture is clouded by uncertainty about exactly how policies will play out at the federal level. Changes to the tax code in Washington could affect revenues in states, as could increased tariffs. Medicaid is expected to be on the chopping block in Congress, to help pay for tax cuts. Serious cuts would have profound consequences for states’ bottom lines.
There will continue to be a divide between red and blue states in responding to policies out of Washington. With Republicans back in charge of Congress and the White House, red states will be largely supportive of stricter immigration measures, while many Democrats promise to resist Trump’s plans for mass deportation.
Within their own borders, state lawmakers will be dealing with an array of complicated matters, from figuring out how to regulate artificial intelligence to making sure residents can afford to purchase home insurance.
All of this adds up to yet another year in which some challenges are entirely predictable while many others remain largely unknown. As officials gear up, here are some of the major topics they’ll be tackling:
AI
State lawmakers are concerned that AI is a powerful, still-evolving technology that could be used in harmful ways, whether intentionally or not. Some lawmakers fear AIfacilitating cyber attacks on critical infrastructure or AI systems making discriminatory hiring decisions. But detractors worry that too much regulation will limit innovation or discourage certain companies from choosing their states.
Many states have created task forces or passed narrow, targeted legislation, such as tackling political or non-consensual sexual deepfakes. But momentum is building for larger, more comprehensive state policies.
California attempted an AI safety-focused bill that its governor vetoed, while Colorado passed an AI policy focused on discrimination. Most state AI regulation this year is likely to adopt the latter’s anti-discrimination focus, predicts Adam Thierer, resident senior fellow with the technology and innovation team at the R Street Institute, a center-right think tank.
At the federal level, President-elect Trump has promised to repeal President Biden’s executive order on AI and not replace it with policies of his own. This could spur states, especially Democratic-led ones, to pass laws to fill the gap, says Scott Babwah Brennen, director of New York University’s Center on Technology Policy.
This could easily lead to a patchwork of policies, although one group may help bring about a greater level of consensus among state legislators. Members of the Multistate AI Policymaker Working Group share ideas, learn together about the technology and may settle on common definitions and frameworks, while tailoring any final laws to suit their individual states. The working group membership includes lawmakers from Colorado and several other states considering similar policies, including Texas and Connecticut. “You don't have to have every state pass these laws for them to have enormous, sweeping effect,” Thierer says. “As soon as you get a half-dozen or more states passing laws like this, it becomes a quasi-national standard.”
Vermont and California are also likely to consider Colorado-style measures, says Eric Null, co-director of the privacy and data project at the Center for Democracy and Technology, a digital rights nonprofit. Meanwhile, Colorado legislators are actively considering possible changes to its law before it goes into effect in 2026. — Jule Pattison-Gordon
(AP/Jacquelyn Martin)
Budgets
After a period of rapid growth, overall state spending was flat last year. Heading into 2025, budgets are mostly in good shape, but there are several risk factors that should make lawmakers cautious. “It’ll be another year of slower spending and slower revenue growth,” says Brian Sigritz of the National Association of State Budget Officers.
As has been long anticipated, extra federal aid from the pandemic era has mostly run out. State sales tax revenues have been in decline for several straight months. Expected tax and spending cuts at the federal level could have a profound effect on states, particularly if Medicaid is slashed. State and local governments receive a third of their revenues from Washington and Medicaid accounts for two-thirds of that money. “State budgets are facing significant risk with reduction of that support,” says Wesley Tharpe, a state tax expert at the Center on Budget and Policy Priorities, a left-leaning think tank.
States are facing their own challenges at home. California, Maryland and Washington all face budget gaps in the billions this year and in the years to come. Although it’s mostly blue states facing big shortfalls, largely due to spending increases in recent years, red states are not immune. Some, including Iowa, Mississippi and West Virginia, enacted tax cuts that are ratcheting up with the start of the year. And the spread of school vouchers throughout Republican states is increasing costs. Half of the new spending called for in the budget proposal from Arkansas GOP Gov. Sarah Huckabee Sanders is devoted to vouchers.
“At first glance, most state budgets seem relatively stable, in terms of not seeing sharp declines in either revenue or spending, and rainy-day funds are sound,” Tharpe says. “Still, states are facing a set of multiple risk factors or strains.” — Alan Greenblatt
Tasha Poullard/TNS
Crime
Crime is down, especially homicide, but the public remains apprehensive. Last November, voters in Arizona and California voted in favor of ballot measures imposing longer sentences. California voters appeared partly motivated by signs of social instability, such as rising homelessness, visible drug use and retail stores keeping basic goods under lock and key, which made voters feel unsafe in their neighborhoods.
This has already triggered a number of states to pass stricter laws, with more expected to follow this year. “The issue for most people isn’t whether something is up or down by 10 percent. It’s that they are seeing randomness and brazenness, and getting a sense of lawlessness,” says Adam Gelb, president of the Council on Criminal Justice, a nonpartisan think tank. “Some of what we’re seeing is more like … shaving off the edges of some of the policies that felt too lenient.”
Polling does show people tend to support stiff punishments for those who commit serious crimes, but when asked how to spend a finite criminal justice budget, respondents tend to forgo long sentences in favor of interventions that can help prevent crime, like mental health and substance abuse treatment, or reduce crime, like police presence as a deterrent, says Kevin Ring, vice president of criminal justice advocacy at Arnold Ventures, a philanthropic organization that funds research into criminal justice policy. “People are waking up to the idea that just because we're mad at somebody doesn't mean that they have to die in prison,” Ring says. “That's not a great return on investment.”
With New Mexico suffering an exceptionally high violent crime rate, Democratic Gov. Michelle Lujan Grisham has been pushing for a slew of bills addressing crime, homelessness, mental health issues and drug overdoses. The bills, among other things, would allow people with diagnosed mental health disorders to be more easily held in jail or involuntarily committed and would up penalties for gun ownership among people with prior felony convictions. The measures failed to pass last year, but 2025 will see the governor and legislative supporters try again, this time with an omnibus bill. "We must confront the hard truth: Mentally ill or drug-addicted people living on the streets cannot be allowed to live that way indefinitely," Lujan Grisham said recently.
The new year brings into effect some new state laws aimed at easing incarcerated people’s re-entry to society. Illinois is ensuring anyone who was charged as a juvenile sees their records expunged two years after completing their sentences, while Missouri has increased the number of expungements a person can seek. Advocates in New York are expected to keep pushing this year for sentencing reforms they believe could reduce incarceration, prison violence and recidivism. But some observers expect these bills will be challenging to pass, with state Democrats divided over their criminal justice goals. — Jule Pattison-Gordon
Education
The movement for private school choice has been riding strong tailwinds since the start of the COVID-19 pandemic. Voters in three states rejected school choice ballot measures last November, but voucher supporters are largely unfazed. In the last two years alone, 11 states have adopted some sort of universal school voucher program.
Republican Gov. Greg Abbott hopes to make Texas the biggest voucher state this year. He backed 15 successful primary challenges in state House races last year to make it happen. In Tennessee, Republicans are planning another push for a voucher program. A GOP-controlled Congress could consider a federal voucher program. And the Supreme Court may rule on a case from Oklahoma involving the use of public funds for religious schools, with potential implications for how far the voucher movement could reach.
Support for private school choice has grown in recent years, with parents unhappy about pandemic-era closures and test scores and chronic absenteeism remaining major problems. Incoming President Trump pledges to shut down the Education Department. While that still seems unlikely to happen, Project 2025, a governing platform prepared by the Heritage Foundation, calls for eliminating funding for Head Start and Title I support of low-income schools.
State legislatures will also weigh funding decisions for public schools against the backdrop of expiring federal emergency funds and drops in student enrollment, attributable partly to state efforts to promote vouchers.
Public schools will remain a major battleground in the culture wars, with school boards battling over transgender students’ rights, parental input into curriculum and controversy surrounding diversity, equity and inclusion initiatives. This atmosphere has not helped with an ongoing shortage of teachers and other school workers, with particularly sharp declines in the number of Black teachers in K-12 schools. “It’s hard to be a teacher when your job is so politicized,” says Kate Callahan, director of Research for Action, an education nonprofit. — Jared Brey
David Kidd/Governing
Housing
With housing costs and a shortage of units remaining pressing issues all over the country, Democrats and Republicans in many jurisdictions have united around the idea of easing permitting requirements and other regulations as a way to promote more construction. Illinois Gov. JB Pritzker recently created a “director of housing solutions” in his administration, and the state legislature is gearing up to consider a range of housing policies, including new state tax credits for affordable-housing construction. Oregon Gov. Tina Kotek is also proposing a record $1.8 billion in spending on housing and homelessness in her next budget. New Hampshire Republican Kelly Ayotte, who will be sworn in as governor on Jan. 8, describes her approach to housing as “build, baby, build.”
Many experiments are also playing out at the local level. Regulatory changes have sparked a wave of new accessory dwelling units in Los Angeles but haven’t lowered housing costs much overall. By contrast, there’s some evidence to suggest that a building boom in Austin, Texas, has helped slow the increase in rent. Several cities and states are working to create revolving funds to build publicly owned, mixed-income housing. And conversions of office towers are reaching a post-pandemic peak, with dozens of office-to-apartments projects expected to be completed in the next two years, according to CBRE, a commercial real estate firm.
Even after years of concerted state and local attention to the affordability crisis, however, housing costs continue to grow across the country. The number of renters paying more than they can afford for housing hit a record 22.6 million in 2023, breaking the record set the year before, according to the Joint Center for Housing Studies of Harvard University.
Trump didn’t speak much about housing on the campaign trail. Housing experts don’t expect his administration to treat housing policy as an immediate priority. But other federal debates — including changes to interest rates, extending the tax cuts from Trump’s first term and potential changes to energy codes for buildings — could affect how much housing gets built and how much it costs to build. “Our take is that the biggest bite at the apple for changing any federal-level housing policy is the upcoming tax reform,” says Francis Torres, associate housing director at the Bipartisan Policy Center in Washington, D.C. — Jared Brey
Insurance
Insurance has emerged as a key concern for state lawmakers who are seeing more companies pull out of their markets, leaving homeowners short on sources of protection.
The frequency of billion-dollar climate and weather disasters has increased nearly 250 percent in recent years. Insurers have been pulling back from disaster-prone states such as California and Florida for decades, but warmer oceans and air are causing dangerous and costly drought, rain, flood, wind and wildfire events throughout the country.
Improving resilience will be a priority following a punishing 2024, creating pressure for owner and community-based mitigation efforts. California’s new requirement that insurers offer discounts for wildfire protection is being watched by other states in the West, who want more evidence that damage will actually be reduced and claim costs go down.
New legislation in Georgia will give premium discounts to property owners who retrofit or build structures with features that help them withstand windstorms. Florida is exploring a similar strategy for condominiums. Lawmakers in Hawaii have asked the state insurance commissioner to submit a study on wildfire risk and market-based approaches to insurance before they meet in 2025.
California’s insurance commissioner believes providers will begin to come back following regulatory changes that allow insurers to set rates using catastrophe modeling that takes expected future risks into account. In exchange, they will be required to sell more policies in high-risk areas and offer safety discounts for wildfire mitigation efforts by communities and homeowners.
Since 1968, 33 states have enacted laws creating last-resort programs in which insurers share risk. Some of these state-administered, privately funded programs are in danger from recurring disasters. Federal reinsurance has been proposed for them, but might not come from an administration focused on cost cutting.
To keep customers and attract new ones, the National Flood Insurance Program, the largest provider of flood coverage, recently announced it would accept monthly payments as an alternative to a single yearly one. The authors of Project 2025, a governing blueprint created for the Trump administration, would like to see this taxpayer-subsidized insurance privatized. — Carl Smith
Ash Ponders/TNS
Medicaid
Medicaid has been in expansion mode in recent years, increasing payments to providers, expanding coverage and even paying, in some states, for non-medical interventions that can affect health, such as housing.
Those days are over. Medicaid is entering a new era of austerity. But just how austere is a huge, unanswerable question at this point.
As Congress considers ways to pay for tax cuts and other expenses expected in budget reconciliation bills this year, Medicaid is clearly a target. With Medicare and Social Security cuts seemingly off the table, Medicaid is the biggest remaining source of potential savings. On Capitol Hill, there’s already discussion of a variety of ways to cut Medicaid spending, including work requirements, per capita caps and lifetime limits, or converting parts of the program to block grants. “These directionally represent a future in which the Medicaid program will be attacked,” says Andrea Ducas, vice president of health policy at the Center for American Progress, a progressive think tank. “I worry about existential threats to the program.”
Aside from looking for savings, some conservatives object to the current imbalance in funding levels under the program. The federal government picks up 90 percent of the cost for those eligible under the Affordable Care Act (ACA), who are able-bodied adults, but less than 60 percent on average of the traditional Medicaid populations of children, adults living in poverty and nursing home residents. Medicaid is not only a strain on federal and state budgets, but delivers “substandard care” while crowding out private health insurance options, according to the conservative Heritage Foundation.
Nine states have trigger laws on the books that would end their Medicaid expansion programs if the extra spending under ACA goes away, while three more have laws in place that could ultimately have the same effect. In the 10 states that never expanded Medicaid under the ACA, the current atmosphere of likely cuts probably stops any momentum toward doing so.
Medicaid makes up an enormous share of state budgets — it’s their largest single spending item, counting federal dollars, and the second-largest expenditure of their own funds, after education. In addition to pushback from hospitals and physicians, serious Medicaid cuts will likely encounter resistance from governors worried about the enormous gap these could create both in terms of their finances and the health-care systems in their states.
So what’s going to happen? No one knows. If Medicaid is cut, it will likely be part of a second reconciliation package, centered on tax cuts, that may not pass until the end of the year — well after state budget-writing seasons are over. “We’re not going to know what could be changing in Medicaid,” says Hemi Tewarson, president of the National Academy for State Health Policy. “So states are going to have to make decisions around programs based on the facts they have before them today, which right now is uncertainty at the federal level.” — Alan Greenblatt
Garret Ellison/TNS
PFAS
PFAS are a group of chemicals used in a wide range of products, valued for their ability to make them stain- or waterproof. Associations between exposure to them and serious diseases are strong enough to prompt bans and restrictions in multiple countries.
A big question for the coming year is what the Environmental Protection Agency (EPA) will do about standards for PFAS in drinking water finalized in 2024. Under these rules, states have two years to create regulations that will keep levels at or below federal standards, followed by monitoring and enforceable compliance. They have access to $1 billion in federal funds to help them implement testing and treatment.
However, during the previous Trump administration, the EPA rolled back more than 100 regulations, almost half of which related to air, water and toxic substances. Shelley Moore Capito, the incoming chair of the Senate Environment and Public Works Committee, questioned the validity of the scientific process by which PFAS standards were set. Lawsuits have been filed on behalf of chemical companies and water utilities questioning EPA science and the scope of its authority. States could see legal challenges from the federal government over standards for water or products that are more restrictive than those set by the federal government.
But state officials are continuing to move ahead. Attorneys general in 30 states and the District of Columbia have filed lawsuits against PFAS manufacturers seeking redress for contamination of water and natural resources. In 2024, 16 states adopted new measures regarding PFAS. Most banned the manufacture and sale of items containing the chemicals, including items ranging from apparel, cosmetics and cookware to firefighting foam, artificial turf and menstrual products. They set aside funds for remediation, cleanup and testing and are expected to continue this work this year.
Hundreds of PFAS bills have already been introduced in 30 states, many with aims similar to those already enacted. A Texas bill would create criminal penalties for the sale of fertilizer products that contain PFAS above prescribed limits; cattle farmers there claim PFAS contamination is killing their livestock. Maine wants to require health insurance providers to cover blood tests for PFAS. — Carl Smith
Social Media
There’s bipartisan support for children’s online safety laws. Still, many policies have faced both ideological and legal pushback. Legal challengers complain that age-based access restrictions conflict with free speech rights, while age verification requirements can prevent adults from remaining anonymous on the platforms. California’s requirement that platforms prevent children from seeing “harmful” content was criticized as government censorship.
Even so, momentum toward regulation is strong. “There’s a ton happening on the legal side and states don’t care — they’re just moving ahead,” says Scott Babwah Brennen, director of New York University’s Center on Technology Policy. Even as courts blocked parts of California’s policy, Maryland moved forward with a related policy.
Social media is a big part of children’s lives, but government officials fear it can lead to depression, sleep disruption and cyber bullying, as well as distracting students during the school day. State lawmakers have tried various strategies for tackling these concerns. States might require platforms to block youth from creating accounts, demand parental consent, limit use of children’s personal data, disable addictive design features on youth accounts or take other actions to avoid presenting “harmful” content to minors. Some policies require platforms to verify users’ ages so they can identify youth accounts.
But social media can be helpful. It’s a lifeline for youth who need information or support for matters they cannot discuss with their parents, such as children suffering abuse at home or LGBTQ youth with unaccepting parents, says Jennifer Huddleston, senior fellow in technology policy at the Cato Institute, a libertarian think tank.
Legislators are likely to watch how the Supreme Court rules on Free Speech Coalition v. Paxton, which is scheduled for oral arguments on Jan. 15. The case challenges a Texas law requiring social media platforms and other websites that host a significant amount of “sexual material harmful to minors” to implement age verification and display warnings.
A new strategy is also gaining steam: banning devices. Louisiana prohibited students using cellphones during school days, while Minnesota and Ohio required school districts to create local policies. In December, the federal Department of Education called on all states, as well as elementary, middle and high schools or school districts, to craft and adopt policies on acceptable cellphone use in school. — Jule Pattison-Gordon
Emily Curiel/ecuriel@kcstar.com/TNS
Taxes
As noted earlier, state budgets are already under considerable pressure this year. Nevertheless, there’s still a good amount of appetite for cutting taxes. But the ambitions of tax-cutters will likely be reduced from recent years, when nearly every state cut taxes.
As recently as November, Louisiana cut personal income taxes by more than $1 billion. Some governors, such as incoming Missouri Republican Mike Kehoe, are talking about eliminating income taxes altogether. Although revenues are projected to decline in Kentucky, further income tax cuts remain a priority for the legislature’s Republican majority. Last year, states including Idaho, Kansas and West Virginia passed property tax cuts. Property taxes are mostly a local matter, but states remain interested in providing relief with bills going up due to increased housing values.
All this activity comes at a time when revenue growth has slowed and significant tax legislation is expected at the federal level. President-elect Trump has proposed eliminating the $10,000 cap on state and local tax deductions imposed by the tax-cut package enacted in 2017. He wants to extend personal income tax cuts included in that bill, which would otherwise expire at the end of 2025, while offering more breaks for businesses. “That could lead to declines in corporate income tax revenues, particularly for the states that conform to the federal code,” says Lucy Dadayan of the Urban-Brookings Tax Policy Center. “Potentially eliminating taxes on tips and Social Security can also have an impact on state tax revenues.”
Jonathan Williams, chief economist with the conservative American Legislative Exchange Council, opposes lifting the cap on state and local deductions, which he says forces the rest of the country to subsidize higher-tax jurisdictions. He favors the overall mission of extending the 2017 cuts, however. “State-level conformity with its expiring provisions, which broaden the income tax base and strengthen revenue for states, provided the ability for states to implement pro-growth tax relief in response, setting off this tax-cut revolution we’ve seen in states in recent years,” Williams says.
In states led by Democrats, lawmakers are considering tax hikes to help pay the bills, mostly on wealthy residents. Last month, outgoing Washington Gov. Jay Inslee prepared a budget that includes a new wealth tax to generate $10 billion over the next four years. Legislative leaders there say some sort of tax increase is likely, due to the state’s budget shortfall.
Taxes on wealth, as opposed to income, may face legal perils, but progressives around the country are still eyeing the strategy as a potential source of significant revenue. “For working people, they’re often taxed on the work that they do, and for wealthy people, they’re not very regularly taxed on the wealth that they hold,” says Jessie Ulibarri, co-executive director of the State Innovation Exchange, a consortium of progressive legislators. — Alan Greenblatt
