Congressional passage of the budget reconciliation package, H.R. 1, in July has set off a rapid series of state-level fiscal and policy adjustments. The law reshapes three areas that directly influence state budgets and, in turn, affect public construction markets and the broader business climate: tax policy, Medicaid requirements, and the Supplemental Nutrition Assistance Program (SNAP).

Early state actions since enactment on July 4 indicate that several provisions are already producing short-term costs, while larger, structural fiscal pressures are expected to intensify over the next several years. These developments come as many states are already navigating slower revenue growth, rising program costs, and reduced fiscal flexibility — conditions that affect contractors dependent on stable public-sector investment.

Tax Code Changes: Immediate State Revenue Impacts

The bill extends and modifies several provisions first enacted in 2017. Because many states automatically conform to the federal definition of taxable income, these changes are now triggering revenue reductions in states that automatically conform. States must now evaluate whether to decouple from federal changes, absorb the losses, or adjust tax structures.

 Several states, including Colorado, Arizona, New Mexico, and Maryland, have already identified substantial revenue declines tied to alignment with the federal code. Pennsylvania has taken early action to avoid similar losses by decoupling during its FY 2026 budget.

 For SMACNA contractors, state revenue trends affect capital budgets, infrastructure investment, and building programs — areas that are sensitive to state fiscal health.

Medicaid Mandates: Higher Administrative Burdens and Reduced Federal Funds

H.R. 1 significantly affects Medicaid, the largest source of federal funding in most state budgets. The law establishes new work and community engagement requirements and mandates more frequent eligibility checks. These changes are expected to reduce federal matching funds as enrollment declines, shifting more financial responsibility to states.

States will also face new administrative costs, including expanded staffing and upgrades to IT systems needed to comply with the new mandates. Compounding these challenges, the law restricts state use of provider taxes that historically helped cover the state share of Medicaid costs — meaning states will increasingly rely on general funds or benefit reductions.

 As these costs grow over time, states may face difficult budget decisions that affect health care infrastructure, public institutions, and long-term funding stability.

Early State Analyses: Growing Concerns for Out-Year Budgets

Several states have already issued fiscal analyses showing significant long-term pressures. For example:

Colorado projects significant revenue losses that contributed to a $750 million deficit, which was addressed during an August special session.

Arizona and New Mexico anticipate tens of millions in additional Medicaid and SNAP administrative costs as early as FY 2027.

New Mexico estimates that its annual new obligations could exceed $1 billion by FY 2029.

These pressures arrive on top of slowing revenue growth and long-term expenditure commitments — factors that historically constrain infrastructure spending and significant capital investment.

States Begin Special Sessions and Task Force Work

States have begun taking action to manage immediate impacts and prepare for larger structural shifts:

Colorado, New Mexico, and Connecticut have convened special sessions to address immediate revenue shortfalls or to shore up programs exposed to federal funding reductions.

Vermont and Arizona are using task forces or oversight panels to study H.R. 1’s effects and plan for future cost shifts.

Multiple state agencies, including those in Arizona, Rhode Island, and Pennsylvania, are requesting new funding or hiring outside consultants to help manage the implementation of SNAP and Medicaid mandates.

These responses reflect broad recognition that states will need sustained monitoring and policy adjustments over several years as federal cost-sharing diminishes.

Implications for Contractors and State–Local Construction Funding

The combined revenue losses and increased state obligations forecast a more constrained fiscal environment in the coming years. While many states currently hold historically high reserves, these funds are temporary tools and cannot permanently offset reduced federal support.

For SMACNA members, several trends are worth monitoring closely:

State capital budgets may tighten federal cost shifting and obligations grow.

Infrastructure programs could face delays or restructuring if state general funds come under pressure.

Public building projects may compete with rising mandatory spending, especially in states with structural deficits.

Understanding these fiscal dynamics will help contractors anticipate potential impacts on bidding opportunities, project timelines, and long-term market conditions.

Bottom Line:

States are facing immediate fiscal challenges from H.R. 1, with significantly larger structural pressures expected in the out years as federal support recedes. While states are using reserves and special sessions to manage short-term needs, the long-term implications point toward a more constrained state fiscal environment.

SMACNA will continue to monitor state responses, analyze the evolving fiscal landscape, and communicate developments that affect construction markets, public investment, and state–local partners.