Today, we are entering a new phase of fiscal federalism, one in which local governments are not just shouldering more of the work but are increasingly responsible for funding and delivering programs originally designed as federal commitments. With its administrative actions and the passage of the One Big Beautiful Bill Act, the federal government is stepping back from its traditional support role. And in doing so, it is placing county governments in particular under intensifying fiscal pressure while leaving in place the legal and programmatic obligations to provide mandated services such as SNAP food benefits or ensuring that county hospitals offer medical care to all regardless of insurance status.
This shift in responsibility was the focus of intense discussion at the recent annual conference of the National Association of Counties (NACo). Across panels and roundtables, the sense was clear: This is not a momentary squeeze, but the beginning of a lasting change in how counties are expected to govern.
This reversal of the federal-local dynamic has profound implications. As federal funding declines and service mandates persist, counties face choices they can’t defer: Raise new revenue, cut core services or both.
County governments operate within a tight fiscal box. Counties generate the majority of their revenue locally. Approximately 70 percent is collected through local taxes and fees; federal funds typically account for just 6 to 8 percent of total revenue.
On the surface, this might suggest that changes at the federal level should have limited impact. But that misses the point. That relatively small federal share often represents a key funding layer for programs with large mandates and wide impact. When federal contributions shrink, the financial responsibility doesn’t disappear — it just gets pushed downward.
As a new NACo report notes, under the One Big Beautiful Bill framework counties and other subnational governments could be responsible for as much as $1 trillion in fallout from reductions in Medicaid and other social services over the next decade — costs they have no historical precedent for absorbing. Further, in some places flexibility is even more limited because their state constitutions require the provision of Medicaid services, putting further strain on already tight budgets.
Meanwhile, Supplemental Nutrition Assistance Program (SNAP) cost shifts are also substantial in two areas: program administration and benefit contribution. Counties in 10 states are facing a required increase in their program administration contribution, resulting in a $2.6 billion cumulative rise in those costs. In addition, for the first time, states will be required to contribute to SNAP benefits for their residents.
These shifts mark a profound change in the intergovernmental contract. The federal government is not just reducing funding — it is redefining who is responsible for the funding of key public services.
In California, for example, the state’s version of Medicaid, Medi-Cal, already faces a multibillion-dollar shortfall. California illustrates how this pressure quickly filters down to the county level. Two-thirds of public-hospital revenues in the state come from Medi-Cal. Reductions in this funding not only jeopardize patient care, including layoffs and hospital closures, they reverberate through local economies. One estimate suggests that for every dollar cut in Medi-Cal, $1.85 in economic output is lost in the broader state economy.
Moreover, a lack of Medicaid coverage does not eliminate the need for health care. Low-income families still require treatment. Counties are legally required to provide indigent care, and without Medicaid many patients shift from preventive services to more expensive emergency interventions. A 2023 analysis by KFF found that states that expanded Medicaid under the Affordable Care Act, compared to non-expansion states, experienced lower rates of uncompensated-care costs and improved financial performance for safety-net hospitals.
Unsustainable Math
Unlike the federal government, counties must balance their budgets every year. So when costs go up and revenues remain flat — or are pre-empted by state policy and impacted by state formula funding reductions — local leaders must find ways to close the gap.
Some counties have taken immediate steps. Coconino County, Ariz., for example, is among those creating stability funds, transferring dollars from reserves to cover any immediate gaps caused by the sudden disappearance of federal funds and create a smoother path for long-term budgeting. Others, especially in more fiscally constrained states, have begun reducing capital spending and scaling back service levels.
But those strategies have limits. In the short term, local governments may cut services to maintain balance sheets. Roads may be repaved every three years instead of two. Hiring freezes can become layoffs. Community amenities like parks, libraries and museums become vulnerable. But over the long term, those cuts may prove unsustainable. Residents expect a baseline level of service, and once that baseline erodes, public frustration can grow.
Eventually, the only path forward may be to raise revenue. As one South Dakota county official put it: “We’ll keep cutting until residents are frustrated enough to support new taxes.” This cycle — cut, degrade, push for new taxes — could become the defining pattern of this new era of fiscal federalism.
The One Big Beautiful Bill was marketed as a federal tax cut. And at the federal level, that’s true: Reductions in income tax rates and the consolidation of certain programs will reduce federal tax burdens for many households.
But there is a consequence to those federal tax cuts: increased local taxes. Local levies will likely increase across sales taxes, property taxes and user fees. These are regressive instruments: Unlike income taxes, they take a higher proportion from low-income households, who spend a greater share of their earnings on consumption and housing.
This shift in the mix of taxation, from progressive federal taxes to regressive local ones, marks another signature trait of the new fiscal era. The total tax burden may remain stable for many Americans, but the equity implications are stark. Those with the least will be paying more — and getting less in the services they need for economic mobility.
Strategic Responses
Even under these pressures, counties are finding ways to act strategically. In many cases, this means drawing from the pandemic-era playbook — not just in how dollars are spent but in how decisions are made.
During the implementation of the American Rescue Plan, for example, local governments didn’t just spend quickly — they spent thoughtfully. They engaged communities, focused on equity, built internal capacity and prioritized outcomes. These lessons are proving essential in the current constrained environment.
For example, one South Dakota county created a Financial Action Network — a group of local volunteers who reviewed the county’s budget and proposed changes. Their involvement didn’t just yield practical ideas; it also increased community buy-in, easing the path for difficult fiscal decisions.
In New Mexico, a regional Council of Governments hired a shared grant writer to support local governments competing for state and federal funds — an efficiency play that also levels the playing field for smaller jurisdictions.
In this moment, success won’t come from austerity alone. It will come from intentional planning, strategic community engagement and cross-sector collaboration that extends local capacity. It will come from investments in data and evidence, helping governments understand which programs deliver results and which no longer meet community needs. And it will come from building public understanding of the hard choices ahead.
Local governments are where mandates meet budget realities, where federal rhetoric becomes local responsibility. And they are where the next chapter of American public service will be written — not in sweeping national plans but in thousands of community-level decisions about what to cut, what to protect and what services to deliver to their constituents.
Jed Herrmann provides budget and program implementation consulting services to state and local governments. He previously served as a senior official at the U.S. Treasury Department, where he worked on the implementation of programs from the American Rescue Plan. Teryn Zmuda is the chief research officer and chief economist at the National Association of Counties.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
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