New Federal Budget Breakdown: Taxes, Cuts, and FY2026 Funding

The federal budget for fiscal year 2026 is the product of two big moves: a sweeping tax-and-spending law signed on July 4, 2025, and a set of appropriations bills Congress finished in early 2026 after a partial shutdown. Together they lock in permanent extensions of the 2017 tax cuts, cut roughly $1.2 trillion from Medicaid and ACA marketplaces over ten years, hold non-defense discretionary spending nearly flat in nominal terms, and leave the government on track for a $1.9 trillion deficit this year.

What Changed on Taxes

The “One Big Beautiful Bill Act” (H.R. 1), signed July 4, 2025, made most of the individual tax changes from the 2017 Tax Cuts and Jobs Act permanent. That includes the current income tax rate structure with a 37 percent top rate, the higher standard deduction, and the 20 percent qualified business income deduction. The child tax credit is permanently set at $2,200 per child, and the estate and gift tax exemption is permanently raised to $15 million per person, indexed for inflation.¹

For businesses, 100 percent bonus depreciation is permanent for property placed in service on or after January 19, 2025. The interest deduction limit reverts permanently to an EBITDA-based calculation, and domestic research and experimental expenditures can once again be deducted immediately rather than amortized.¹

Several new or expanded provisions matter for individual filers:

The state and local tax (SALT) deduction cap rises temporarily to $40,000, with a phaseout for high earners, then reverts to $10,000 in 2030.
A new deduction for auto loan interest of up to $10,000 applies to loans originated after December 31, 2024, and expires after 2028.
“Trump Accounts” for eligible children come with a one-time $1,000 federal contribution and $5,000 in annual contributions allowed.
A $6,000 senior deduction is available to filers 65 and older.¹²

The treatment of tipped and overtime pay is less clear-cut. One summary reports that the House-passed “no tax on tips” and “no tax on overtime” provisions were dropped from the final law.³ Another describes temporary deductions in the enacted version for qualified tips (up to $25,000) and qualified overtime pay (up to $12,500 for individuals), each with income phaseouts.¹ The law also accelerated the expiration of clean vehicle and home energy tax credits.²

The Congressional Budget Office scored the law as reducing revenue by $4.5 trillion over 2025 through 2034.⁴

What Got Cut

The reconciliation law’s largest spending reductions hit Medicaid, CHIP, and the Affordable Care Act marketplaces, cutting a combined $1.2 trillion in gross federal spending over ten years. Medicaid and CHIP alone account for roughly $990 billion.⁵⁶

The single biggest saving mechanism is a new work-reporting requirement. Starting January 1, 2027, most adults aged 19 to 64 enrolled in Medicaid through the ACA expansion must document 80 hours per month of employment, job training, education, or community service. CBO projected this alone would reduce federal spending by $325.6 billion over ten years.⁵ Other major provisions:

The safe-harbor threshold for state provider taxes drops from 6 percent to 3.5 percent, saving $191.1 billion.
Eligibility redeterminations move from annual to every six months, saving $62.5 billion.
Provider reimbursements are capped at Medicare rates in expansion states, saving $149.4 billion.⁷

The law also bans Medicaid payments to abortion providers for one year (with narrow exceptions), restricts coverage for many lawfully present immigrants, and removes the additional 5 percentage point federal matching incentive for states that adopted Medicaid expansion.⁷⁵

CBO estimated that 10 million people would become uninsured by 2034 from the Medicaid and marketplace changes: 7.5 million from Medicaid and CHIP cuts, and 2.4 million from marketplace reductions. That estimate did not account for the scheduled expiration of enhanced marketplace premium tax credits at the end of 2025; if those expire, the total could reach roughly 15 million uninsured by 2034.⁶

Beyond health programs, the reconciliation framework targeted SNAP, student loan repayment programs, and Pell Grant eligibility. The House budget resolution assigned the Agriculture Committee $230 billion in cuts and the Education and Workforce Committee $330 billion.⁸ The law also raised the statutory debt limit by $5 trillion.⁹

What Congress Actually Funded for FY2026

The annual appropriations process stretched deep into the fiscal year. Congress passed most of the twelve required bills by early February 2026, coupled with a short-term continuing resolution for the Department of Homeland Security. When that stopgap expired without a deal, a 76-day partial shutdown of DHS began on February 14 and ran until President Trump signed the final DHS spending bill on April 30, 2026. That final bill excluded funding for Immigration and Customs Enforcement and Customs and Border Protection entirely, a concession Democrats demanded; Republicans signaled plans to fund those agencies through a future reconciliation vehicle, with roughly $70 billion under discussion.¹⁰¹¹

Final defense appropriations for FY2026 came in at $838.7 billion in total discretionary funding, well below the president’s $961.6 billion request.¹² The FY2026 National Defense Authorization Act, signed December 18, 2025, authorized $890.6 billion for national defense, $8 billion above the president’s NDAA request of $882.6 billion.¹³

Non-defense discretionary funding totaled $783 billion, a nominal increase of 1.1 percent over FY2025. Adjusted for 3 percent inflation, that is 1.8 percent below 2025 levels and 7 percent below 2020 levels in real terms. As a share of GDP, non-defense discretionary spending fell to 2.5 percent, roughly a third lower than in 2010.¹⁴

Congress rejected the administration’s deepest proposed cuts but held spending tight. Notable line items:

$8.2 billion for WIC, an increase over 2025.
$38 billion for Housing Choice Vouchers, up 7 percent.
$18.5 billion for Project-Based Rental Assistance, up 10 percent.
Public housing cut by nearly $500 million.
IRS regular funding reduced by $1.1 billion, on top of an earlier $11.7 billion rescission of mandatory funding.¹⁴

Lawmakers also built in guardrails to keep the administration from redirecting or withholding money Congress intended to spend. Programmatic funding levels became legally binding rather than advisory across nearly 60 budget accounts in 12 departments. New deadlines were set for grants tied to afterschool programs, research, and hazard mitigation. Provisions at HHS, Labor, and Education reinforced staffing requirements, and language blocked changes to indirect expense caps on federally funded university research.¹⁴

The Deficit and Debt Picture

CBO’s June 2026 baseline projected a $1.9 trillion federal deficit for FY2026, equal to 5.8 percent of GDP. Over the ten-year window from 2026 to 2036, cumulative deficits are projected at $24.4 trillion, with the annual shortfall growing to $3.1 trillion (6.7 percent of GDP) by 2036.¹⁵

Total federal spending over that decade is projected at $94.6 trillion. Mandatory spending and interest already consume 75 percent of the budget in 2026 and are on track to reach 80 percent by 2036. Net interest costs alone are projected at $16.2 trillion, and by 2036 interest payments would consume 26 cents of every dollar of federal revenue. Gross federal debt is projected to climb from $38.6 trillion to $63.7 trillion, reaching 136.4 percent of GDP.¹⁵

The reconciliation law itself increases the unified budget deficit by $3.4 trillion over 2025 through 2034, driven by the $4.5 trillion revenue drop partially offset by $1.1 trillion in reduced direct spending.⁴ The Penn Wharton Budget Model projected the law would raise debt by 7.2 percent over ten years and 13.5 percent over thirty years, with lower-income households losing lifetime value from safety-net cuts while the top 10 percent of earners received roughly 70 percent of the legislation’s total value.¹⁶

Tariff revenue has grown but has not materially changed the picture. Customs duties reached $195 billion in FY2025, a 150 percent increase over FY2024. The legal status of many of those tariffs is uncertain: the U.S. Trade Court ruled that tariffs enacted under the International Emergency Economic Powers Act are illegal, and the Supreme Court is expected to weigh in. If those rulings hold, projected net tariff revenue over the next decade would fall by $2.2 trillion, and roughly $90 billion of FY2025 collections could require refunds.¹⁷

How Social Security Fits In

The 2026 Social Security Trustees Report, released June 9, 2026, accelerated the projected depletion of the Old-Age and Survivors Insurance trust fund to 2032, one year earlier than the previous estimate. Combining the retirement and disability trust funds pushes depletion to 2034, at which point an automatic 17 percent benefit cut would occur without congressional action.¹⁸

The reconciliation law contributed to that worsened outlook. By reducing taxes owed on Social Security benefits, it lowered trust fund revenue and accounted for about a quarter of the increase in the program’s solvency gap. The rest of the deterioration reflected lower fertility assumptions (from 1.9 to 1.75 children per woman) and lower assumed immigration. The 75-year actuarial shortfall grew to $31 trillion, the largest imbalance since 1977.¹⁸¹⁹

How States Are Absorbing the Cuts

Federal Medicaid cuts hit state budgets directly. CBO estimated expansion states would see uninsured rates rise five times more than non-expansion states. At least seven states faced immediate fiscal pressure from new restrictions on provider tax “uniformity waivers” that took effect as early as April 1, 2026, including Illinois, Massachusetts, Michigan, Ohio, and West Virginia.²⁰ Researchers estimated that by 2034, more than 100 rural hospitals could face a high risk of closure, with potential losses of 300,000 to 400,000 jobs and $15 billion in local tax revenue.²¹

State responses varied. Nebraska announced it would begin enforcing the new federal work requirements on May 1, 2026, well ahead of the January 2027 federal deadline. Four states eliminated Medicaid coverage for GLP-1 obesity treatments in late 2025 to manage costs. Multiple states began rolling back state-funded coverage for immigrants ineligible for federal Medicaid.²⁰

Governor Gavin Newsom’s proposed 2026–27 California budget, released January 9, 2026, projected General Fund spending of $248.3 billion against a “small and manageable” deficit of $2.9 billion. Revenue projections had improved by $42.3 billion across three fiscal years, driven largely by personal income tax and capital gains. The administration took a “wait and see” approach on federal changes, proposing to apply federal work requirements to immigrants receiving state-funded Medi-Cal and declining to fund 44,000 previously promised child care slots or extend homelessness investments. Total reserves were projected at $23 billion.²²

New York’s SFY 2026–27 budget, finalized May 28, 2026, totaled roughly $268 to $269 billion, between Governor Kathy Hochul’s proposed $260 billion and the State Senate’s $270 billion target. It included $39 billion in school aid, $1 billion in utility relief checks for 8.2 million residents, and a new “pied-à-terre” surcharge on luxury second homes in New York City valued at $5 million or more, estimated to raise $500 million annually. New York also eliminated state income taxes on up to $25,000 in tipped wages and modified its climate law, dropping the 2030 target for a 40 percent emissions reduction. Personal and corporate income tax rates were not raised, though pandemic-era corporate tax increases were extended through 2029.²³²⁴

What’s Next for FY2027

President Trump submitted the FY2027 discretionary budget request on April 3, 2026, proposing a 10 percent cut to non-defense discretionary funding compared to FY2026.²⁵ Congress is required to pass all twelve FY2027 appropriations bills by September 30, 2026, though analysts expect final action to slip past the midterm elections into a lame-duck session in late 2026 or early 2027.¹⁴ Republicans have also signaled they may use a follow-on reconciliation bill to fund ICE and CBP, the two agencies left out of the final FY2026 DHS deal.¹¹

1
LaPorte. Overview of the Budget Reconciliation Bill
2
Internal Revenue Service. One Big Beautiful Bill Provisions
3
ACSM. Reconciliation Bill – House, Senate, Final Law
4
Congressional Budget Office. Estimated Budgetary Effects of Public Law 119-21
5
Georgetown University Center for Children and Families. Medicaid, CHIP, and ACA Marketplace Cuts Explained
6
Georgetown University Center for Children and Families. New CBO Health Coverage Estimates
7
Civic Federation. Medicaid Cuts Enacted Under Federal Budget Reconciliation Bill
8
Penn Wharton Budget Model. The FY2025 House Budget
9
Bipartisan Policy Center. What’s in the Senate Finance Committee Bill
10
American Hospital Association. House Passes Appropriations Package to End Partial Government Shutdown
11
National Low Income Housing Coalition. Last FY26 Spending Bill Signed Into Law
12
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13
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14
Center on Budget and Policy Priorities. Tight 2026 Non-Defense Funding
15
House Budget Committee. CBO Baseline Projections
16
Penn Wharton Budget Model. House Reconciliation Bill Analysis
17
Committee for a Responsible Federal Budget. Tariff Revenue Soars in FY 2025 Amid Legal Uncertainty
18
Committee for a Responsible Federal Budget. Analysis of the 2026 Social Security Trustees Report
19
Bipartisan Policy Center. 2026 Social Security Trustees Report Explained
20
KFF. Medicaid: What to Watch in 2026
21
Pew. New Federal Medicaid Policies Compound State Budget Pressures
22
California Budget Center. Understanding the Governor’s Proposed 2026-27 California Budget
23
New York State Focus. New York Final State Budget 2026 Funding Guide
24
New York State Assembly. SFY 2026-27 Enacted Budget
25
NADO. President Trump Releases FY27 Budget Request