The Biggest Issues to Watch in 2026

At the start of each year, Governing writers and editors compile a list of the biggest issues to watch in state and local government in the coming 12 months. Some of the topics show up almost every time — budgets, for example — but each year brings its own mix of crucial issues to the fore.

This year, the list was largely shaped by Washington, where the Donald Trump administration and the GOP's One Big Beautiful Bill have wrought changes in areas as disparate as Medicaid, public health policy, artificial intelligence, transportation funding and emergency management. States are scrambling to meet the moment, often via legislation, though sometimes by trying to shore up their processes and manage their responsibilities more effectively.

Here are some of the biggest issues to watch in the states in 2026.

• Budgets
• Federalism
• Artificial Intelligence
• Make America Healthy Again
• Medicaid
• Utility Costs
• Emergency Management
• Transportation Funding
• Zoning and Land Use
• Renewable Energy
• Election Administration

BUDGETS

States are tightening their budgets as revenues decline and spending needs rise; any tax cuts are likely to be tightly targeted, and states will be watching to see whether the Supreme Court upholds Trump’s tariffs and whether the federal government reaches a budget deal.

Expect the belt-tightening to continue in 2026. States’ revenue growth has been slowing for several years in a row, as they come down from the booming revenues of FY2021 and FY2022. Now, federal pandemic aid is ending and the broad tax cuts some states adopted a few years ago have lowered their tax bases. At the same time, spending demands on states are rising faster than revenue.

States are grappling with medical inflation, infrastructure needs, and new financial responsibilities put on them by the federal government. The federal One Big Beautiful Bill Act pushes new Medicaid and SNAP costs onto states; states are already feeling some effects. Early costs could include investing in new or updated Medicaid eligibility IT systems. The federal government is also asking states to assume more of the costs of disaster aid.

Some states are reconsidering how they conform to federal tax codes. Tax cuts introduced in the OBBBA rapidly reduced revenue for states that automatically match their tax code to the federal one. Colorado legislators met for an emergency session in August to figure out how to plug a $750 million budget hole created by the act. Illinois and Pennsylvania have responded to the OBBBA by decoupling parts of their tax codes from the federal code.

In 2026, states and cities will also be watching to see whether the Supreme Court upholds or strikes down President Trump’s tariffs. The court heard oral arguments in Nov. 2025. A recent National League of Cities report found 40 percent of respondents are worried tariffs could impact procurements; cities expected to spend more and potentially cancel or delay projects. Cities have also been tightening budgets in the face of tariffs, inflation, slowing growth in sales tax revenue and anticipated declines in income tax.

Still, many states spent the past few years building up their financial reserves, reducing debt and borrowing and being careful with spending, and so remain in stable financial conditions this year, says Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers (NASBO).

“State fiscal conditions are stable but tight,” Sigritz says.

To balance budgets, some states are cutting vacant positions or instituting hiring freezes and likely will continue with similar measures, Sigritz says. They’re limiting new spending and enacting targeted tax increases such as higher personal income taxes on the wealthy and sin taxes on sports betting and cannabis. Some are considering taxing newer economic sectors like AI companies and digital services. Unlike the broad tax cuts of earlier years, states looking at tax relief now are focusing efforts on helping populations like children, low-income residents and the elderly.

States have been focusing their FY26 budgets on improving affordability and quality of life and encouraging long-term economic growth efforts, per a NASBO report. That includes items like more college financial aid, transportation projects and better Medicaid provider reimbursement rates.

In 2026 states will be watching attentively to see if the federal government is able to reach a new budget deal in January. States will also be expecting to enter the new year with some new funds from the Rural Health Transformation Program. — Jule Pattison-Gordon

FEDERALISM

The Trump administration has been testing new levers for compelling states to follow its agenda, including using the National Guard and threats to cut federal funding.

States can expect to continue adjusting to a federal government that has avidly sought to impose its agenda on lower levels of government.

“The Trump Administration has been consolidating power at the federal level, often at the expense of state authority,” says David Konisky, a professor at Indiana University Bloomington, whose research focuses include federalism.

The federal government last year deployed the National Guard for unusual purposes: to tackle everyday urban crime and generally peaceful protests, thus asserting federal oversight of what is typically local or state government jurisdiction. Trump has focused this intervention on Democratic cities, over objections of their governors.

“[President Trump’s] use of a National Guard again reflects his unitary conception of the federal system,” says John Kincaid, President of the Center for the Study of Federalism and professor of government and public service at Lafayette College.

Some of Trump’s methods have raised legal and constitutional questions, putting a spotlight on the courts. For example, federal judges have thus far blocked National Guard deployments in Portland and Chicago and deemed their deployment in D.C., and prolonged deployment in Los Angeles, to be unlawful. The Supreme Court’s temporary emergency decisions have tended to be favorable toward the Trump administration, but more telling will be the merits decisions that the Court likely will make in 2-3 years, Kincaid says.

Another central piece of the new federal playbook: federal funding as a carrot and a stick. Trump is trying to use “federal funding as a cudgel to try to get states to do what he wants them to do,” and in doing so, creating a “much more coercive and transactional” form of federalism, Kincaid says. In some cases, this means threatening to withhold funding for reasons not closely tied to the purpose of the funding. For example, a federal program officer reportedly explained that funding for a University of Maine offshore wind turbine project was being halted over a dispute about transgender athletes.

Other times, funding is offered as an incentive for adopting administration goals. The administration invited universities to sign a compact agreeing to adopt a broad array of policies — including around admissions, international enrollment, hiring, tuition, grading, viewpoints expression on campus and trans women — in exchange for various “federal benefits,” like preferential treatment in the tax code and for federal research grants and visa approvals.

At the same time as the federal government claims more authority, it’s also asked states to share more of the costs for programs like SNAP and Medicaid, changes that will have strong impacts on state budgets in coming years. — Jule Pattison-Gordon

ARTIFICIAL INTELLIGENCE

Everyone will be tracking how the new White House executive order targeting state AI laws unfolds, and states are likely to keep trying to pass targeted AI legislation this year.

Federal preemption has roared back into the AI debate — if it ever really left. President Donald Trump signed an executive order in December calling for federal agencies to use legal and financial pressures to compel states to abandon AI regulations that the administration regards as “onerous and excessive.” The order also calls for presenting Congress with recommendations for creating a “minimally burdensome” federal AI policy to preempt states’ stronger measures. It’s a return to a familiar idea: the White House released an AI Action Plan in July telling federal agencies to find ways to withhold AI funding to states with “burdensome” AI regulations, but which did not clearly define what kinds of laws counted as burdensome.

Now all eyes will be on the states, Congress and the courts. The executive order is expected to face legal challenges, possibly from California. Congress, in turn, has a mixed history on federal preemption — often considering then rejecting the idea. This summer, legislators scrapped a proposal to impose a 10-year moratorium on state and local governments enforcing AI regulations. Late in the year, Congress considered including a state AI law moratorium in the National Defense Authorization Act (NDAA), then abandoned the effort.

Meanwhile, several state legislators plan to continue with AI legislation. That includes Colorado Rep. Brianna Titone, whose Colorado AI Act was the only law explicitly called out by the executive order. 2026 could also bring some answers about that particularstate law, which — though it passed in 2024 — has yet to be implemented. State lawmakers and stakeholders are expected to meet in the new year to continue debating how to revise the law.

“[AI] will be a number one issue in the states, regardless of what the executive order is,” said National Conference of State Legislatures CEO Tim Storey during a December media call days before the executive order was released. “States are going to continue to move on it.”

States are starting to turn away from comprehensive policies in favor of more tightly focused regulations, and this trend could continue in the coming year. For example, Connecticut Sen. James Maroney failed twice to get a comprehensive AI regulation bill passed, so he’schanging gears in hopes of getting at least some protections in place; next year he aims to introduce a bill focused on use of AI in employment decisions and government.

States have also shown bipartisan support for curbing AI-generated nonconsensual intimate images, deepfaked child sexual abuse material and election-related deepfakes. The National Conference of State Legislaturesexpects that states will continue to focus on stopping AI-powered online impersonation.

In 2025, several states also turned attention to chatbots, with laws restricting their use in therapy, preventing them from encouragingself-harm and/or requiring them todisclose that they’re not real people. Minors are seen as particularlyat risk from conversational companion chatbots, which couldspur more laws targeting the technology next year. — Jule Pattison-Gordon

MAHA

There’s bipartisan support for the Make America Healthy Again goal of reducing chronic disease rates, if not all of its strategies. Several states, both red and blue, have begun adopting policies that conform with Health and Human Services Secretary Robert F. Kennedy Jr.’s vision for improving America’s health. 

The Department of Agriculture has approved waivers that allow 18 states to ban the use of food stamps for purchase of sodas and other unhealthy food; 11 more are already in line for them. Utah and Florida have enacted bans on fluoride in drinking water, and many more introduced fluoride bills that will be considered this year (the American Public Health Association has pushed back against claims that water fluoridation is harmful). States across the country have introduced bills aimed at regulating chemical dyes in food — in 2025, 75 such bills were introduced in 37 states, according to the National Conference of State Legislatures. The food industry is bracing for more bans to be enacted in 2026.

These changes have sometimes put Republican and Democratic lawmakers in rare agreement with one another. California’s 2023 food dye bill predates Kennedy’s tenure, and many of his positions have traditionally been adopted by left-of-center politicians (and voters).

But many of Kennedy’s most central positions continue to clash with the medical establishment and with the prevailing attitudes of some statehouses. The Centers for Disease Control and Prevention this year released guidance changing children’s vaccine recommendations and limiting eligibility for COVID-19 vaccinations. In response, more than two dozen states have taken steps to allow pharmacies to administer COVID-19 vaccines without a prescription. A smaller number are requiring insurers to continue to cover them irrespective of changes.

Two governor-led regional groups, the West Coast Health Alliance and the Northeast Public Health Collaborative, are collaborating to develop their own vaccine guidelines. These alliances, and individual states, could be expected to make their own decisions about childhood vaccine schedules in the coming year.

At the same time, red states like Idaho have made vaccine mandates illegal. 

Limiting consumption of ultra-processed foods is another major part of Kennedy’s MAHA platform. In December, the city of San Francisco filed a lawsuit against major producers of ultra processed foods, naming defendants including Kraft, Kellogg’s, General Mills and Coca-Cola. — Carl Smith

MEDICAID

Changes to Medicaid enacted in the One Big Beautiful Bill Act have set the stage for major budget and administrative challenges for states.

Federal support for insurance for low-income Americans is expected to decrease by nearly $1 trillion over the next 10 years. 

State budgets are already tight. Revenue forecasts point downward and pandemic aid is winding down. Medicaid accounts for about 30 percent of state spending, and more than half the federal dollars they receive.

This money goes to service providers — hospitals, nursing homes, physicians and pharmacies. The Commonwealth Fund estimates that 2026 Medicaid cuts alone could cost states nearly 900,000 jobs and more than $100 billion in GDP and tax revenue.

The most immediate — and daunting — task for Medicaid directors is making the IT, personnel and administrative changes necessary to implement new work requirements and more frequent eligibility checks. These are expected to be in place by the beginning of 2027. The new rules apply to the more than 20 million Americans who obtained coverage as the result of state Medicaid expansion programs.

The Centers for Medicare and Medicaid Services has issued some implementation guidance, but all the policy specifics aren’t expected until later this summer. States will have to work to get processes in place in about six months after the rules are finalized.

In the meantime, Medicaid offices need funding. A Government Accountability Office study of a Georgia Medicaid work requirement found the state spent twice as much implementing the requirement as on medical assistance to enrollees. There’s money in the One Big Beautiful Bill Act to cover a major share of the costs of new equipment and staff, but it comes in the form of reimbursement. States will have to make their own commitments to implementation to receive matching funds.

Some states have created Medicaid budget funds or increased provider taxes. Provider taxes are part of the state share of Medicaid funding in every state but Alaska, most often imposed on institutional providers such as hospitals and nursing homes. By adding to state spending totals, they increase federal matches.

The Urban Institute estimates as many as 6 million Americans in expansion states could lose coverage in 2026. Hitches in systems created to verify employment, or medical frailty that obviates the work requirement, are expected to cause some of this.

Others may lose coverage if they live in states that raise income standards for expansion programs, or decide to end them because of federal cuts. In October, Medicaid funding for some lawfully present immigrants will end, and reimbursement rates for emergency care provided to patients ineligible for Medicaid due to their immigration status will be greatly reduced. — Carl Smith

UTILITY COSTS

Elected officials are increasingly acting to rein in rising utility rates as part of a broader effort to lower the cost of living. 

It’s getting more expensive to keep the lights on. Average utility bills rose more than 10 percent in 2025 alone, far faster than overall inflation. Rate increases in 2025 added up to more than $85 billion, according to some estimates. Utility administrators expect higher winter heating costs this year than last year, led by spikes in the cost of electricity and natural gas. The end is not in sight. “It’s hard to see utility bills coming down in this decade,” says Rob Gramlich, president of Grid Strategies, a Washington, D.C.-based energy consultancy.

Several factors are contributing to the spike. The one grabbing the most headlines is the breakneck development of new data centers around the U.S., tied to the rise of new artificial-intelligence technologies and growing usage of traditional web services, like social media and streaming. One new data center in Northwest Louisiana will use twice as much energy as the entire City of New Orleans. Many data centers also require expensive new transmission infrastructure to deliver power to their servers. The underlying costs of infrastructure construction, from materials to labor, has also spiked since the start of the COVID-19 pandemic. Both factors — the rising demand for energy and the cost of new infrastructure — raise electricity prices for everyday people, as utilities typically spread the costs among all ratepayers.

The issue is already becoming consequential in state and local politics. Mikie Sherrill, the incoming governor of New Jersey, won a resounding victory last year after campaigning on a promise to declare an “energy emergency” and freeze utility rates. Democrats in Georgia flipped two seats on the Public Service Commission amid anger over rising energy bills. Two decades ago, following the last major spike in utility costs, California entered an energy crisis marked by rolling blackouts and resulting in the fall of then-Gov. Gray Davis. Like many other cost-of-living challenges, rising utility rates are not something that people tend to take in stride.

“Voters take it out,” Gramlich says, “on whoever happens to be sitting there.” — Jared Brey

EMERGENCY MANAGEMENT

Emergency response starts with imagining events that could strike a community without warning. There’s a new uncertainty in the air this year: how state and federal responsibilities for disasters will change.

States have long relied on institutional knowledge and support from the Federal Emergency Management Agency, including funds to cover as much as 90 percent of disaster costs. President Trump and Homeland Security Secretary Kristi Noem have both suggested the agency should be eliminated. States, not the federal government, should bear the biggest share of responsibility and cost, they say.

What this will mean in practice should come into focus in the coming year. Noem and Defense Secretary Pete Hegseth were appointed chairs of a council tasked with making recommendations on the future role and function of FEMA. The council’s recommendations were set to be approved and released on Dec. 11, 2025, but the meeting was canceled.

The biggest disasters of 2025, the devastating Eaton and Palisades fires, struck California before the new administration took office and before a wave of cuts to FEMAstaff, funding and infrastructure. A September report from the Government Accountability Office warned that staff shortages could “mean disaster” for future response efforts. A relatively tame 2025 hurricane season did not put new structures to the test.

In April, FEMA canceled a $4 billion program to fund disaster mitigation projects. Twenty states sued, and in December a federal judge ruled that the administration did not have authority to end the program. It's one of several changes that have been challenged by states in court. It's possible more could come this year.

Many jurisdictions across the country depend on FEMA to fund the lion's share of staff costs — between 70 and 96 percent, says Lynn Budd, Wyoming Homeland Security Director and president of the National Emergency Managers Association.

“We’re trying to rearrange all the funding that supports our staff so we can try and fill gaps for local jurisdictions,” she says. Budgets that anticipated multi-year support are in limbo. — Carl Smith

TRANSPORTATION FUNDING

With the Infrastructure Investment and Jobs Act expiring, cities and states are urging Congress to increase transportation spending to keep up with inflation. They’re also competing for a bigger piece of the pie.

It’s a pivotal year for transportation funding.

This year, most funding from the Infrastructure Investment and Jobs Act, a bipartisan bill signed by former President Joe Biden in 2021, will expire. Congress will have to decide which parts of it to extend, and at what level of funding. While transportation funding was traditionally an area of bipartisan accord in Washington, the years leading up to the IIJA were politically rocky. Several times Congress opted for one-year extensions to transportation funding rather than the comprehensive half-decade funding packages they had traditionally approved — and that state transportation departments and transit agencies prefer. It remains to be seen whether Congress will find a coalition to pass a multi-year bill, opt for a one-year extension or something else altogether.

State and local departments and agencies are largely united around some goals, especially the size of the bill they’re hoping to get from Congress. There’s broad consensus that elevated inflation since the pandemic limited the impact of the record-setting investments of the IIJA. State departments of transportation, which receive the lion’s share of funding from most surface transportation bills, are pushing for a IIJA spending levels plus inflation as a “baseline” for the next transportation package. Public transit agencies are seeking a bill that “restores purchasing power lost to inflation over the past five years.”

But there are deep fault lines when it comes to spending priorities, going back to the beginning of the IIJA and well before. One relates to the allocation of federal funding to cities versus states. State DOTs want more funding distributed to the states via formula grants, which is how most spending on roads is currently allocated. But IIJA gave cities a bigger taste of direct funding through competitive grant programs, and groups like the National League of Cities are hoping for more money for local jurisdictions and regional planning organizations. One prominent advocacy group, Transportation for America, is calling for a total overhaul of the transportation funding program, citing a lack of progress on safety, congestion relief, and basic maintenance of infrastructure.

Other divisions loom as well. The Republican-led Congress last year clawed back some grants that had goals related to equity and social justice, and the Trump administration has wavered in its support for electric-vehicle infrastructure. The U.S. Department of Transportation has even recently proposed slashing billions of dollars in federal funding for public transit. The next few months leading up to the midterm elections could determine how significant and lasting an impact the second Trump administration will leave on transportation and infrastructure.  — Jared Brey

ZONING AND LAND USE

Cities and states continue to chip away at barriers to housing construction in hopes of lowering costs. Researchers project softening demand for housing in the coming years.

The rising cost of housing has plagued public officials for years, and last year, costs reached new heights. Elected leaders — including Democratic mayors and city council members from big, high-demand cities and Republican state legislators representing rural districts — have experimented with solutions focused on zoning and land use policies meant to promote more construction of lower-cost housing.

Some cities, notably Austin, Texas, have permitted enough housing in recent years to meaningfully address their local supply shortage, with ensuing reduction in average rental prices. Those examples have buoyed YIMBYs, who have long argued that rapid development of new housing is the best way to fight unaffordable rents. In California, YIMBYs are coming off a banner year in which the state Legislature approved one of their long-sought priorities, a bill that allows denser housing development near transit stations. (Its main sponsor, state Sen. Scott Wiener, is now running for Congress.) And the basic proposition that high housing costs result from a shortage of housing is broadly accepted. As New York’s socialist-aligned Mayor Zohran Mamdani put it late last year, “There has never been more consensus across the ideological spectrum that we are indeed in a housing crisis” and that more housing needs to be built.

Still, other zoning-related efforts led by big cities may be falling out of favor. Portland, Ore., has begun to see some results from an inclusionary zoning law meant to prod developers into providing below-market-rate apartments as part of market-rate projects, after years of underperformance. But smaller cities have had less success with similar laws — some, like Kansas City, Mo., have reportedly been completely ineffective. Some city leaders are pushing for inclusionary zoning laws to be repealed while others are facing legal challenges from developers. Katie Wilson, Seattle’s newly elected progressive mayor, has focused her housing plan on social housing (affordable apartments built and owned directly by the city) rather than set-asides in private developments. 

Some researchers expect a change in the prevailing winds. While housing costs set records last year, they also began to stabilize, as the rate of growth slowed down. That’s partly the result of an uptick in homebuilding over the last few years. But it could also be a sign of a broader trend, with anticipated lower rates of household formation in the coming decade and lower demand for housing. 

“The housing market right now is very tenuous,” says Yonah Freemark, a researcher at the Urban Institute. “I think that means a lot of communities are going to see declining housing costs even if they don’t have increased housing supply.” — Jared Brey

RENEWABLE ENERGY

After years of continuous growth, state and local renewable energy programs enter 2026 facing headwinds from the federal government.

On Inauguration Day, President Donald Trump issued an executive order calling for a pause in the disbursement of funds to support clean energy implementation and manufacturing allocated by the Inflation Reduction Act (IRA). This was the first in a series of steps back from a historic federal commitment to emission reduction.

An April executive order directed the U.S. Attorney General to identify state laws “burdening” domestic energy production that could be considered unconstitutional or pre-empted by federal law. The One Big Beautiful Bill enacted in July rescinded unobligated IRA funds, among other measures intended to undercut incentives to invest in renewables. The government has also cut billions in clean energy grants, though that move has been challenged in court. Twenty state attorneys general, for example, filed a lawsuit against the U.S. EPA for cancelling Solar for All, a $7 billion program intended to bring solar energy to low-income families.

This year, it’s likely we’ll continue to see the federal government try to move the focus away from renewable energy. Most recently, President Trump has expressed an intention to prevent the shutdown of aging coal plants.

States are pushing back. Seventeen AGs joined together for a lawsuit seeking restoration of funding for EV deployment, a key piece of the transition to clean energy. Seventeen have also sued over an executive order halting permits for wind projects.

State attorneys general are also readying themselves for challenges to their energy policies from the Department of Justice. The DOJ has already filed suits against Vermont, New York, Hawaii and Michigan over state climate regulations it views as inconsistent with federal energy policies.

Despite changing federal priorities, the U.S. Energy Information Administration says that solar will increase its share of electricity generation in the coming year. Several states are pressing ahead on renewables despite the administration’s pivoting priorities. Members of the U.S. Climate Alliance, a bipartisan coalition of governors representing 24 states and territories, say they remain committed to a net-zero future. “No matter the obstacles, we are pressing forward,” said Alliance co-chairs, Wisconsin Gov. Tony Evers and California Gov. Gavin Newsom,at the release of the group’s annual report. — Carl Smith

ELECTION ADMINISTRATION

With control of Congress on the line in the midterm elections, election administrators expect the scrutiny, misinformation and harassment that has engulfed their work in recent years to increase. 

A March 2025 executive order demanding changes to election administration set the stage for potential problems to come. The executive branch does not have authority over state procedures, and in October a federal court blocked the order’s demand that the Election Assistance Commission incorporate a proof of citizenship in federal voter registration forms.

This doesn’t mean pressure from Washington will subside, or other demands in the executive order won’t be reflected in changes to state law. For election directors, these are “known unknowns.”

The Supreme Court last year agreed to hear a Mississippi case addressing whether states are allowed to count ballots sent by Election Day but received days afterward. Trump’s March order sought to prevent these ballots from counting toward the official tally. A ruling on the matter is expected in June or July.

The U.S. Postal Service added a new wrinkle to the issue last year, announcing that mail may not always be postmarked on the day it’s dropped in a mailbox. This could cause counting and perception problems in states that do post-election counts of ballots postmarked by election day.

Historically, the party that’s not in the White House makes gains in the midterms, points out Weber County, Utah, Clerk Ricky Hatch, a Republican. If the pattern repeats this year, he’s concerned that election officials will be blamed and security threats will follow. (Some states have enacted new protections for election officials and poll workers in recent years.)

Election interference attempts from China, Russia and Iran reached new highs in 2024. But support for federal cybersecurity infrastructure has gone by the wayside since the last election, says Eric Fey, director of elections for St. Louis County, Mo.

A recent Supreme Court ruling gave candidates standing to challenge election laws. This is expected to add to controversy regarding election procedures such as mail-in voting, as any candidate can file such a suit independent of proof they have been harmed. If such suits lead to last-minute legislative changes to election procedures, this will mean painstaking work for election officials.

Redistricting may also cause headaches for local officials. If lines change, it’s a time-consuming, labor-intensive process to consult maps and geographic information systems to determine which voters are in each of the redrawn districts, Fey says, especially if they don’t follow census blocks.

The challenge in getting things right is further exacerbated by court cases around redistricting efforts and the timelines for their resolution. A case now before the Supreme Court could take away legal arguments against racial gerrymandering and affect civil rights doctrine more broadly.

Election officials are “heads down,” focused on their jobs, Brennan Center attorney Liz Howard says. The midterms are an “all hands on deck” moment, she says, one that depends on cooperative efforts by election administrators, law enforcement, local officials and legislators. — Carl Smith