The new year begins with a layer of both fiscal and political uncertainty. For at least 18 states, it will be a year of change in political leadership. After several years of continuous revenue growth, states are crafting their Fiscal Year (FY) 2027 budgets amid slower growth, rising costs, and heightened unease. At the same time, the 2026 gubernatorial campaign season also begins in earnest. More than three dozen governorships are on the November ballot, and at least 18 states (see Figure 1) expect to elect a new governor due to an incumbent either being term-limited or choosing not to run for re-election.
Figure 1: Map showing states with a 2006 gubernatorial campaign.
This political and fiscal overlap is forcing policymakers and stakeholders to navigate landscapes of political and economic unknowns and opportunities. They are encountering differing priorities and agendas of a new administration and the publics’ increasing demands for affordability and services. Meanwhile, these concerns are converging with states’ rising long-term obligations and expenditures related to recent federal funding reductions and tax policy and entitlement reforms passed in the “One Big Beautiful Bill” Act (OBBBA).
Given the current political and fiscal environment, TBED and innovation initiatives, without some concerted effort, risk getting back-row seats in early 2026. Over the coming months, governors and lawmakers will release their budget proposals, which are likely to focus on limiting spending, as well as prioritizing core services such as education, public safety, and Medicaid, which are at risk due to budget resets. Issues involving affordable housing, energy, and AI are also anticipated. The following is a brief overview of the states’ fiscal conditions heading into FY 2027.
Most states are entering the new year with healthy reserves amassed during the fiscal years of 2021–2023, during which they experienced unusually strong revenue growth driven by federal stimulus, rapid economic recovery, and inflation. However, that growth has now normalized to what the National Conference of State Legislatures (NCSL) calls a “transitional period” in which surpluses shrink and revenues slow. This transitional period typically results in cautious budgeting, lower revenue estimates or projections, and muted-to-flat spending, with some states drawing on their reserves to maintain service levels. The recent major federal policy shifts enacted in the OBBA are also creating significant pressure on states’ budgets and the potential for future structural gaps. These gaps increase the states’ revenue share responsible for administering such programs as Medicaid and SNAP (Supplemental Nutrition Assistance Program).
Recent budget documents and fiscal analyses from the Center on Budget & Policy Priorities (CBPP), the NCSL, and National Association of State Budget Officers (NABSO) drawing on data from the current fiscal year (FY 2026) provide comprehensive views of what states can expect in the new fiscal year, with most states facing a more constrained, uncertain fiscal environment.
The CBPP reports that a majority of states are experiencing weakening revenue trends, with many facing shortfalls or slower-than-expected growth, although not all at the levels previously forecasted earlier this summer. States such as Arizona, California, Colorado, Hawaii, Nebraska, and others either have or are reporting downward revisions to revenue forecasts or emerging deficits. And of those states facing shortfalls, the severity varies widely. Some of the states with emerging or substantial deficits entering FY 2027 include Kansas, Maryland, Missouri (the state’s budget faces a fiscal cliff by mid-2028 when its accumulated surpluses will be depleted per a recent auditor’s report), New York (has a projected $26.8 billion cumulative gap over the next four years, though analysts argue this is driven by conservative revenue forecasting rather than true structural imbalance), and Washington. While the governors in Oklahoma and South Dakota have announced they are proposing flat or limited budgets for FY 2027, due to lower revenue projections or shortfalls.
The NCSL also notes that broad-based tax cuts enacted during the surplus years are now colliding with consumer spending declines and slower revenue growth, making it harder for states, such as Idaho, and Iowa to sustain previous levels of spending without significant budget cuts or use of reserves; and Hawaii’s governor has proposed pausing or reversing its previously enacted tax cuts due to revenue declines. Nonetheless, lawmakers in Kentucky, Missouri, and West Virginia are all proposing additional tax cuts despite modest revenue growth and overall revenue uncertainty.
Meanwhile, there are several states going into FY 2027 with strong or relatively stable fiscal conditions including: Arkansas; Connecticut, which continues to run surpluses due to strong fiscal controls, and Indiana (the state’s budget surplus could grow to nearly $5 billion by the middle of 2027 under a recent tax revenue projection); South Carolina and Texas report modest but positive revenue trends; while New Mexico continues to benefit from strong natural resource revenues and healthy reserves, although growth is starting to show signs of cooling.
SSTI is monitoring all new budget proposals. Future issues of the Digest will highlight and discuss any new budget proposals that contain significant economic development, TBED, or innovation announcements. Additionally, we will provide—after primaries have been held, and the candidates are determined—information about any economic development, TBED and innovation initiatives mentioned in gubernatorial platforms.