Medicaid vs. Tax Cuts: The Impossible Choice Facing U.S. States

If the federal government slashes Medicaid funding to finance tax cuts, states will be thrust into a crisis with no easy escape. Lawmakers will face a stark choice: raise state taxes to cover the shortfall or strip healthcare from millions of vulnerable Americans. Either way, the political and economic fallout will be severe.

The Medicaid Crisis: States on the Hook

Medicaid is a lifeline for more than 85 million Americans, covering low-income families, children, pregnant women, seniors in nursing homes, and people with disabilities. The program is jointly funded, with the federal government typically covering about 60% of the cost and states handling the rest. But if Washington decides to cut its share—potentially by hundreds of billions of dollars—the burden shifts dramatically to the states.

Unlike the federal government, most states must balance their budgets. That means they cannot simply print money or borrow indefinitely to cover gaps. Their choices are limited and painful:

• Raise state taxes – Increasing income, sales, or property taxes would be politically risky and economically damaging, especially in states already struggling with high living costs.
• Slash Medicaid enrollment – Many states would be forced to kick millions of people off Medicaid, leaving them uninsured and relying on emergency rooms for care.
• Cut benefits – Even those who remain on Medicaid could see reduced coverage, with fewer services for mental health, dental care, and long-term support for the elderly.
• Lower payments to hospitals and doctors – This could drive providers away from treating Medicaid patients, creating medical deserts in already underserved communities.
• Divert funds from education and infrastructure – To avoid tax hikes, some states might gut public schools, delay infrastructure repairs, and slash other essential services.

Which States Will Raise Taxes? Which Will Cut Medicaid?

Not all states will react the same way to Medicaid funding cuts. Some states, especially those with a history of prioritizing healthcare and progressive taxation, are more likely to raise taxes to make up for the shortfall. Others, particularly lower-tax states, may opt to cut Medicaid benefits or restrict eligibility instead.

States More Likely to Raise Taxes to Cover Medicaid Cuts:

1. California – Has one of the most extensive Medicaid programs (Medi-Cal), a high-tax structure, and a history of raising taxes to fund healthcare initiatives.
2. New York – Medicaid is a significant part of its budget, and the state has a progressive tax system with room for increases.
3. Massachusetts – Strong commitment to healthcare (first state to implement universal coverage pre-ACA). Likely to raise taxes rather than reduce Medicaid services.
4. New Jersey – High tax state with a large Medicaid population; could respond with tax increases to maintain services.
5. Illinois – Struggles with budget deficits but has leaned toward tax hikes to sustain social programs.
6. Minnesota – Progressive tax policies and a long history of prioritizing healthcare funding.
7. Oregon – Has used innovative tax solutions (such as hospital and provider taxes) to fund Medicaid.
8. Washington – Generally leans towards protecting social services through revenue measures.

States Less Likely to Raise Taxes (More Likely to Cut Medicaid Instead):

• Texas, Florida, Tennessee, South Dakota – No state income tax and historically resistant to expanding Medicaid.
• Alabama, Mississippi, Arkansas – Tend to prioritize spending cuts over tax increases.
• West Virginia, Kentucky – Expanded Medicaid but may struggle to raise taxes due to economic constraints.

Current Budget Negotiations: The Push to Cut Medicaid

The likelihood of Medicaid funding cuts has increased due to recent legislative actions and proposals. The House of Representatives passed a budget resolution proposing $4.5 trillion in tax cuts over the next decade, accompanied by $2 trillion in spending cuts, including a significant $880 billion reduction targeting Medicaid.

While Republican leaders argue that these cuts are necessary for fiscal responsibility, critics—including many state governors—warn that such reductions will devastate healthcare access for millions. Public opinion polls indicate that Medicaid remains popular among Americans, with more than half opposing funding cuts, but political pressure to reduce federal spending remains strong.

Meanwhile, negotiations over the budget reconciliation bill continue, with Senate Republicans undecided on whether to integrate these Medicaid cuts with a broader tax-and-spending package. If the Senate balks, the House’s aggressive approach may stall. However, if they push through, states will be left scrambling to either raise taxes, slash benefits, or find some other way to absorb the financial shock.

Who Wins? Who Loses?

Let’s be clear: Medicaid cuts don’t save money—they shift costs. When people lose coverage, they don’t stop getting sick. Instead, they delay care until they require expensive emergency treatment, which taxpayers and hospitals must absorb.

Meanwhile, the winners of federal tax cuts are often businesses and high-income earners, who see their tax burdens shrink while states scramble to fund essential healthcare. This is a classic case of fiscal juggling with lives on the line—pushing costs away from the federal balance sheet and onto state governments and vulnerable populations.

State Leaders Caught Between a Rock and a Hard Place

For governors and state legislators, Medicaid cuts would create a political minefield. Republican-led states that once fought Medicaid expansion may suddenly have to raise taxes to preserve even basic healthcare. Democratic states, already struggling with rising healthcare costs, would have to choose between cutting other social services or taxing residents even more.

The question becomes: Who will take the blame? The federal government, for slashing funding? Or state governments, for raising taxes or cutting benefits? Either way, the American people will suffer the consequences.

Is There a Way Out?

States could try to innovate their way out of the crisis—privatizing Medicaid, pushing for federal waivers, or shifting to managed care models—but no solution is painless. The simplest answer is for Congress to fund Medicaid properly instead of using it as a piggy bank for tax cuts.

If the federal government pulls the rug out from under Medicaid, states will be forced to make impossible choices—and the most vulnerable Americans will pay the price. The real question is: Are we, as a nation, willing to accept that?