April 09, 2026
By Lily Padula
Introduction
Federal funding supports about a third of Illinois’ total All Funds operating budget, funding a variety of programs including health and human services. Changes in federal policy create significant fiscal and operational pressure for the State. The enactment of H.R. 1 represents a shift in the federal-state fiscal relationship, increasing Illinois’ responsibility for administering and financing core health and human services programs that the State previously could depend on the federal government to provide. These looming changes introduce new fiscal pressures and uncertainty for Illinois, particularly as implementation unfolds and longer-term impacts become clearer.
The Governor’s proposed FY2027 budget reflects a short-term, reactive approach, building upon previous tax decoupling action and increasing SNAP and Medicaid administrative funding to address near-term impacts. However, these actions do not address longer-term risks. Medicaid changes pose the most significant fiscal threat, while SNAP creates more immediate but growing costs.
Illinois is actively challenging several federal actions that threaten to cut a variety of grant programs through litigation, which has delayed the implementation of these cuts and alleviated near-term pressure. However, the real fiscal impact depends on favorable legal outcomes for the State. Overall, the Governor’s budget proposal responds to immediate needs but lacks a long-term strategy to address structural funding gaps and increasing fiscal uncertainty.
H.R. 1 and Federal Policy Changes: Fiscal Exposure for Illinois
Short-Term Budget Response: Tax Decoupling
Illinois is among 26 states with “rolling” conformity to the federal Internal Revenue Code (IRC), meaning federal tax changes automatically affect state revenues unless the state “decouples.” While this simplifies administration, it can expose revenues to significant and unpredictable shifts. In FY2026, Illinois faced an estimated $836 million revenue loss from H.R. 1 federal tax code changes, driven largely by expanded business expensing provisions.
To mitigate these fiscal impacts, Illinois selectively decoupled from federal provisions while maintaining conformity in other areas (see Understanding H.R. 1: How Federal Tax Code Changes Could Impact Illinois). Decoupling helps stabilize the tax base in the short term and provides a targeted way to mitigate specific federal policy changes without broader tax restructuring. However, it does not eliminate total revenue loss or forecast uncertainty, address longer-term reliance on economically sensitive revenue sources, or avoid the need for ongoing legislative action as federal policy evolves.
The State addressed these tax code conformity issues in the current 2026 fiscal year and does not anticipate any further significant impacts to the FY2027 budget. Therefore, the FY2027 budget proposal does not include any additional actions to decouple from H.R. 1 tax code changes.
Near-Term Fiscal Pressures: Supplemental Nutrition Assistance Program (SNAP)
The main financial impact expected in FY2027 resulting from federal policy changes relates to Illinois’ food assistance benefits program. H.R. 1 significantly increases Illinois’ cost of administering the Supplemental Nutrition Assistance Program (SNAP). Beginning in FY2027, the law changes eligibility rules, reduces the federal administrative match from 50% to 25%, and in FY2028, introduces a new cost-sharing requirement tied to payment accuracy (see Understanding H.R. 1: How New Federal Rules Could Reshape SNAP in Illinois). The shift in administrative match is expected to reduce Illinois’ federal revenue by $80 million in FY2027 and the increase in benefit costs related to Illinois’ payment accuracy could cost close to $700 million beginning in FY2028 unless Illinois improves its error rate. This creates strong incentives for increased administrative investment in eligibility systems, staffing, and verification processes.
The FY2027 budget proposal includes $50 million to improve program administration and minimize benefit loss. This includes 450 additional caseworkers and IT investments to reduce errors and automate checks for income eligibility. While this targeted budget adjustment helps manage near-term impacts, the fiscal and operational pressures are expected to grow over time as cost-sharing provisions take effect.
Long-Term Fiscal Risk: Medicaid
Under H.R 1, federal Medicaid funding is expected to decline, and additional administrative costs will be required to implement new mandates, such as change to eligibility rules. The reductions are driven by five major policy changes set to go into place in FY2027 and FY2028 (see Medicaid Cuts Enacted Under the Federal Budget Reconciliation Bill). These changes reduce federal support through lower enrollment, increased administrative burden, and constrained financing mechanisms, resulting in a minimum reduction of approximately $26 billion (could be as much as $51 billion) in federal funding through FY2034. Illinois is particularly vulnerable due to its reliance on federal Medicaid funding, creating the potential for significant budget pressure in the future.
While the FY2027 proposed budget provides funding to help with the changes going into effect this year (part of the $50 million stated above), the proposal does not outline a clear long-term mitigation strategy and does not include reserves or structural adjustments tied to these anticipated federal funding reductions.
Litigation and Fiscal Uncertainty
Since January 2025, there have been over 650 lawsuits filed against the Trump administration nationally; Illinois has filed or joined 51. Multiple provisions of H.R. 1 are currently being challenged in court, including some changes to Medicaid. More broadly, Illinois has faced a range of federal funding disputes and threats including funding for the City of Chicago, programs supporting low-income families, and Chicago Transit Authority’s (CTA) Red Line Extension and Red/Purple Modernization projects. While many of these actions have been paused or reversed through litigation, they underscore a broader pattern of federal funding uncertainty.
In the near term, ongoing legal challenges limit immediate fiscal pressure by delaying or potentially reducing the impact of these federal changes. However, outcomes remain uncertain, and adverse rulings could result in rapid increases in state costs and administrative obligations—and subsequent programmatic pressures. The State’s current budget approach appears contingent on favorable decisions, or delayed or partial implementation, creating risk that Illinois may be underprepared if federal changes are ultimately upheld.
Federal Funding Uncertainty Across Sectors
Beyond the immediate effects of litigation, Illinois’ exposure to federal funding extends across multiple sectors, including transit (CTA and region systems), higher education and research funding, and public health and human services (e.g., Temporary Assistance for Needy Families [TANF] and child care). While the fiscal impacts in these areas may emerge more gradually, they contribute to the State’s overall fiscal exposure.
Declining federal support is a significant concern, but the growing unpredictability in federal support presents a separate and compounding risk. This makes it more difficult to plan and sustain long-term investments, particularly in physical infrastructure, such as CTA projects, and in human capital and knowledge development through higher education and research.
Conclusion: Reactive but Contingent
Illinois has taken steps to address near-term implementation needs, particularly through increased administrative funding to head off changes to SNAP and Medicaid, but has yet to outline a comprehensive strategy to manage the full fiscal impact of recent federal policy changes.
H.R. 1 introduces new and ongoing fiscal pressures rather than one-time shocks, with Medicaid changes posing the most significant long-term risk and SNAP creating more immediate but manageable costs that are expected to grow over time. While ongoing litigation reduces near-term pressure by delaying implementation of numerous funding cuts, it also increases uncertainty about future federal support. As a result, future budgets may need to address structural funding gaps and incorporate contingency planning for potential adverse legal outcomes and sustained shifts in the federal-state fiscal relationship. Overall, Illinois’ FY2027 proposed budget reflects a short-term strategy to prepare for and manage anticipated federal changes, while remaining dependent on favorable litigation outcomes for long-term stability.