Across the United States, state budgets are facing a new reality: the era of pandemic-era federal largesse is over, and the aftershocks are rippling through capitals from Connecticut to California. While some states, like Connecticut, are managing to stay afloat—even projecting surpluses—others are wrestling with the consequences of years of spending growth fueled by federal funds that have now dried up.
On December 1, 2025, Connecticut State Comptroller Sean Scanlon delivered a cautiously optimistic update. Despite an unexpected loss of over $100 million in revenue this month, largely tied to recent tax changes and a deficiency in the state’s Medicaid program, the state is still on track for a budget surplus. "Despite us seeing substantial, over $100 million, loss of revenue [this month] because of that tax change coming from Washington and because our Medicaid program is in deficiency, we’re spending more money than we budgeted for," Scanlon said during his Economic Update. "We still are on course to have a surplus at the end of this budget."
The tax changes Scanlon referenced stem from the One Big Beautiful Bill Act (OBBA), a federal measure that dramatically altered both state revenue streams and financial obligations. The OBBA repealed a previous requirement that corporations amortize domestic research and development costs over five years. Now, companies can expense those costs immediately, a move that slashed Connecticut’s anticipated corporate tax revenue. According to Office of the State Comptroller (OSC) Economist Michelle Parlos, the state revised its corporate tax revenue estimates downward from $186.9 million to $136.9 million, with an additional $50 million drop due to underperformance.
But the OBBA’s impact didn’t stop there. It also introduced new prerequisites for Medicaid eligibility, mandating work requirements and proof of legal residency for recipients. These changes coincided with the expiration of enhanced premium healthcare subsidies from the Affordable Care Act, which had been introduced during the pandemic. Despite these pressures, state officials now predict a $164.4 million surplus in the General Fund and a $43.7 million surplus in the Special Transportation Fund for Fiscal Year 2026, as outlined in the OSC’s latest Economic Update.
Scanlon explained the paradox: "The change that the Big Beautiful Bill made allows the [Corporation Tax] phase-in to essentially go out, and instead of us observing the revenue loss through the corporate tax over a course of several years, it’s hitting us all at one time, and therefore, you had a big change this… month that is a significant hit to our budget." However, he noted, "The reason why it is not damaging to us, along with the Medicaid increase, where we see an $80 million overage, for lack of a better way to describe it, of our Medicaid program, is that we’re seeing growth in other revenue sources." Withholding and sales tax revenues were revised upwards by $76 million, helping to offset the losses elsewhere.
Yet, Connecticut’s situation stands in stark contrast to the fiscal headaches facing several other states. According to The Center Square, states like Washington, California, Illinois, Pennsylvania, and Louisiana are grappling with budget crunches after years of increased spending built on the foundation of temporary federal pandemic relief. Washington state, for instance, doubled its budget from about $80 billion in 2013-15 to more than $173 billion today—a staggering 116% increase during a decade when inflation rose just 35.63%.
Rep. Travis Couture, a member of Washington’s Economic and Revenue Forecast Council, voiced skepticism about the results of this spending surge. "At the end of the day you have to ask yourself, ‘What did we get for that new spending?’" he asked. "At the end of the day, we don’t see the results on what we’re spending on." The state’s financial woes were compounded by the OBBA’s deep cuts to Medicaid funding, leading Caitlin Safford, Senior Health Policy Advisor to Governor Bob Ferguson, to describe the situation as "the worst budget crisis we’ve ever had." Medicaid spending in Washington has ballooned by 500% since 2013, with enrollment nearly doubling to about 2.2 million people—over one in four residents—while the state also spent $150 million on healthcare for undocumented immigrants.
California, too, has seen its annual spending soar by $106.3 billion—up 50% per capita—since Governor Gavin Newsom took office in 2019. Critics like Howard Jarvis Taxpayers Association’s Susan Shelley have accused the state government of "recklessly over-projecting revenue to meet the requirement for a balanced budget while increasing spending," adding, "They’ve used accounting trickery that would make Enron blush." The Newsom administration did not respond to requests for comment, but the spending spree has continued even as federal support waned.
Illinois presents a similar story. Under Governor J.B. Pritzker, discretionary spending has climbed $16 billion, or 43%, in nearly seven years. The state’s three post-pandemic budgets alone increased general fund spending by about $15 billion. Researcher Ravi Mishra of the Illinois Policy Institute noted, "Having one party basically in control over your state gives a bit too much power to do whatever they want." The state’s Commission on Equity and Inclusion, for example, doubled its budget without delivering improved results for minority and women-owned businesses seeking government contracts—a move former Republican state representative Tom Demmer criticized as ineffective bureaucracy.
Pennsylvania’s annual budget has ballooned by nearly 64% under Governor Josh Shapiro and his predecessor, with the state’s structural deficit projected to hit $4.8 billion this year. Nathan Benefield, chief policy officer of the Commonwealth Foundation, attributed the worsening situation to "overspending" and praised the legislature for rejecting some proposed increases. Four areas—K-12 education, human services, corrections, and the state treasury—now account for 85% of Pennsylvania’s state spending.
Louisiana, meanwhile, has seen its annual budgets rise more than 71% over the past decade, driven largely by Medicaid expansion and reliance on federal recovery funds after Hurricane Katrina and COVID. Erin Bendily, a policy expert at the Pelican Institute for Public Policy, warned, "That growing dependence on federal money can be dangerous." However, Jan Moller of Invest in Louisiana argued that, apart from Medicaid, state budget increases have actually lagged behind inflation. Governor Jeff Landry, in a video outlining his fiscal plans, promised to "cut waste and keep spending in check," describing the new budget as a "tremendous step forward for fiscal responsibility."
Back in Connecticut, officials are mindful of the uncertain economic outlook. Scanlon noted that while the state’s rainy day fund provides a cushion against a "classic recession," a downturn paired with additional federal changes could force tough choices reminiscent of the 2008-09 crisis. Further complicating matters, a government shutdown has delayed the release of October’s unemployment and job growth data, with September’s report now expected on December 11.
As the dust settles on the pandemic spending era, states find themselves at a crossroads. Some, like Connecticut, are navigating the transition with cautious optimism and fiscal discipline. Others are facing the consequences of years of budget growth untethered from long-term revenue, now forced to reckon with the prospect of cuts, deficits, and political infighting. The next year will test whether statehouses can adjust to this new normal—or whether the after-party hangover will be felt for years to come.
