🥊 Trump uses federal funding to control states. We’ve got ways to fight back.
States need to rethink tax policy.
You may notice we’re under a new banner. Moving forward, the artist formerly known as Counter Punch will be Upper Cut. New name, same determination to step into the ring swinging. Thanks for following along!
This week, we’ve got ideas for boosting revenues — to strengthen state economies AND resilience in the face of democratic backsliding.
Withholding funds can go both ways
Are you a governor facing budget gaps? 🔗 Ask if decoupling is right for you 🔗
Have natural resources? It’s time to capitalize on them 🤑
With Tax Day approaching, we’re thinking about Trump’s One Big Beautiful Bill Act (OBBBA). Its tax cuts for the rich blew a hole in the federal budget, leaving states to make up the difference for necessities like Medicaid and SNAP. For Trump, that’s intentional. Just this week, the President said states should fund Medicare and Medicaid with their own money because he wants to focus on waging illegal wars. Message received.
What are blue states supposed to do? Our answer: reduce reliance on federal funding. The more blue states depend on Washington, the more vulnerable they are to Trump’s chaos and political coercion. Self reliance is in fact a way to fight back against democratic backsliding.
In the Punch List we’ll dive into what tools states have. But first, let’s talk about who’s feeling the squeeze — and why.
Blue state budgets are under pressure: When Trump signed the OBBBA into law, he didn’t just kick off an explosion in the federal deficit. The bill also leaves states scrambling to make up the resulting deficits in state budgets, forcing them to weigh cuts to critical programs, like Medicaid and SNAP against other general fund priorities, like education.
But the OBBBA is not the only way the Trump administration has trampled blue-state budgets: In January, it attempted to freeze $10 billion in family support funding to five Democratic states (a district judge temporarily struck down the order). In February, it cancelled $1.5 billion in transportation infrastructure and community health grants in California, Colorado, Illinois, and Minnesota. And if disaster strikes? Blue states and their residents are currently three times less likely to receive federal funding for relief than their red state neighbors.
And when it’s not direct cuts, the Trump Administration is politicizing funding to undermine blue-state priorities: The Trump administration is now attempting to condition all federal program funding, for example, on compliance with the administration’s ban on DEI policies. Yet again, states could be left holding the bag.
So what? The more blue states are hostage to federal government funding and tax policy, the less ability they have to set their own agenda.
How are blue states responding so far?
Adjusting budgets to fill anticipated gaps: States are conducting budget reviews and reappropriating spending as they attempt to mitigate the impact on their citizens.
Suing: In the past year, blue states have filed many of the nearly 200 lawsuits challenging the Administration’s assaults on federal funding. (P.S. They’re winning.)
Reforming state tax policy: States are repealing tax breaks and focusing on increasing revenue to reduce their reliance on the federal government (more on the ideas states are, and should be, considering in the Punch List …).
States can be far more aggressive. By focusing on achieving greater economic self-sufficiency, blue states can set their own priorities, serve their residents, and stand up to the administration.
This is the model states should work towards. As always, we’ve got some ideas for how.
THE PUNCH LIST
Sick of billionaires and out-of-state corporations getting tax breaks? States “decoupling” their tax code from federal definitions are preserving HUNDREDS of millions of dollars. Many states conform certain parts of their tax codes to the federal government’s. So, when the federal government makes a change, the state’s code changes along with it — even if that change reduces the state’s revenue, like when OBBA expanded or created a slew of corporate tax deductions. But states don’t have to go along. Instead, they can “decouple” from the federal tax code and keep the revenues coming.
Pennsylvania estimated it saved $1.1 billion by decoupling from corporate tax changes in the OBBBA.
In Michigan, similar changes were estimated to save $449 million in a single year.
Delaware expects to save $328 million through fiscal year 2028 after decoupling from the corporate tax provisions in the OBBBA. Without the change? The state expected to lose $400 million — or about 5% of the state’s budget.
Do you represent a state rich in resources that Americans rely on? Pass a severance tax to fund your priorities. Generally, severance taxes are imposed on the extraction of a natural resource destined for use outside of the state — as resources “severed” from their natural location. The upside? These taxes mostly get passed on to consumers outside of the state. You might be surprised that it’s oil-and gas-producing red states, like Oklahoma and Texas, that have figured out how to raise billions of dollars through severance taxes. Blue states with substantial natural resources (California, Pennsylvania) have some catching up to do. The model? New Mexico, which announced it will fund no-cost, universal child care funded by taxes on oil and gas revenue. Here are some more ideas:
While Pennsylvania seeks to capitalize on its natural gas reserves, California could levy a tax on almonds (it produces 100% of the country’s supply).
Maine could impose a severance tax on lobster (it harvests over 80% of the country’s supply).
Michigan has even explored applying a severance tax to bottled water.
It takes money to make money: Boost your tax enforcement budget. At the federal level, a recent study found that an $80 billion investment in the IRS would have led to nearly 8x returns over 10 years. Turns out if you invest in finding tax avoidance, it’s quite possible you’ll find … significant tax avoidance. Blue states should invest in the practice.
After boosting tax enforcement, focus the enforcement strategy on the likeliest sources of fraud. States could, for example, strengthen their False Claims Act — like in New York, where the state permits the AG and private whistleblowers to pursue civil fraud actions in significant cases involving misrepresentation of taxes. One result of that law? A $330 million tax fraud settlement. (We’ll note that in some blue states, it’s not just about strengthening, but actually passing a False Claims Act … looking at you Maine, Michigan, and Oregon.) Another idea: announce risk-based corporate audit programs that focus on companies that pursue a common marker of potential tax evasion, like threatening to move a company’s corporate headquarters out-of-state.
Are you a state legislator? Create mechanisms to allow for the withholding of payments to the federal government. If the federal government is going to mess with state budgets, blue states can put them on notice that they’re not scared to punch back (forgive the pun). While potential responses raise unresolved legal questions, they undeniably send a message: two can play this game. Some examples:
In Oregon, a proposed bill would give the state the option to withhold payments from the federal government, if the federal government is withholding funds to Oregon.
In Maryland, a proposed bill would authorize the state’s budget department to place liens on certain federal property in the state in response to federal non-compliance with court orders related to congressionally-authorized spending.
NEW YORK UNDERSTANDS ITS POWER.
New York State Senator Andrew Gounardes, the Chairman of the Committee on Budget and Revenue, has been laser-focused on how creative tax policy can strengthen budgets and governance. His take:
“Trump is using federal funding as a weapon: handing out tax breaks to billionaires while targeting his political opponents by cutting food off kids’ tables and health care from working families. We can’t rely on Washington — so we’re not going to. By decoupling our tax code and making sure everyone pays what they owe, we keep New York money in New York and build fiscal independence to keep delivering for our residents no matter what Washington throws at us. Every dollar counts.”
FIGHTING FIRE WITH FIRE
🥊 Gov. Sherrill is using the World Cup to support her budget. With an influx of out-of-state visitors headed to her state this summer, the newly-elected Governor proposed a bill to temporarily hike sales tax to 9.625% near World Cup matches, in addition to an increase in hotel taxes. Even better? She’s proposing a 10 percent surcharge on World Cup match gambling revenue.
🥊 Maryland wants data brokers to pay. Maryland legislators are eyeing a dual registry and tax on data brokers that would cost just $1.3-1.8 million million annually to administer while generating between $90–$100 million per year in taxes and penalties.
Upper Cut is a collaboration between Salt River Valley Project and Evergreen Legal — two organizations that believe punching back is the policy playbook this moment demands. It’s how we fight a rigged system, make courage contagious, and deliver for people against the leaders holding them down.