State governments receive roughly one-third of their funds from the federal government. State government entities also have constitutional requirements to balance their budgets.
As such, the passage of OBBA, signed into law on July 4, figures to reverberate throughout the public sector for years to come. The extent of OBBA’s impact at the state and local government levels is yet to fully materialize.
Many states have already spent years decreasing revenues through tax cuts, leaving little slack available. And, many are already planning for cuts to government services and operations amidst an economic uncertainty, high interest rates, and fewer federal funds.
The changes that OBBA makes to federal funding for Medicaid and SNAP will put additional financial pressure on state and local governments, and the bill’s passage was concurrent with Trump administration actions designed to reduce the federal government’s scope.
Those actions include firing scores of federal workers, canceling or holding grant and procurement funds and projects, and eliminating programs and offices. The fallout from these steps the administration has taken can already be seen at the state level.
For example, the state of Maryland recently announced plans to slash more than $120 million from the state’s personnel budget. Faced with expected lost revenue from federal employees, the state is implementing a combination of state employee buyouts, a hiring freeze and the elimination of at least 150 government positions in an effort to cut costs.
If recent developments present a potential upside for state and local government entities, it could be the addition of displaced federal employees to their talent pools. Recent data suggests that many of these workers want to stay in public service at either a state or local level, and a number of states and localities have already stood up programs to help them do just that.
In March, for instance, California Gov. Gavin Newsom issued an executive order directing the California Department of Human Resources (CalHR) to streamline the hiring process for displaced federal workers seeking employment with the state of California.
CalHR responded with the launch of a new campaign designed to help current or former federal workers apply for California government roles, including a new website, where would-be applicants can learn more about job opportunities with the state.
Meanwhile, nonprofit organizations such as Civic Match and the Partnership for Public Service have played a crucial role in helping transitioning federal talent connect with these opportunities.
Since launching in 2024, Work for America’s Civic Match talent matching initiative has sought to connect displaced federal talent with state and local government agencies eager to put their talents to good use.
Much remains to be seen, of course, in terms of how the impact of OBBA plays out across state and local government. But there are several components of the bill that will have an effect at these levels.
For example, the SALT deduction increase to $80,000 through the year 2030 could affect local tax revenues, which in turn could affect local government workforces.
Similarly, details as to how the bill’s clawback of Inflation Reduction Act (IRA) funds for energy and infrastructure projects will unfold. But, it’s clear that the loss of these funds, coupled with new administrative requirements for new funds, presents another challenge for state and local government to take on.
The Trump administration also withheld more than $6 billion in previously approved school funding, while it conducts what the Office of Management and Budget called an “ongoing programmatic review.” The White House recently announced that its set to unfreeze the K-12 funds, but organizations that expected those funds to be released on time are now scrambling, with roughly a month until school begins.
Under OBBA, a new federal tax deduction for “qualified overtime compensation” is also available for tax years 2025 through 2028. At least some public employees—those in public safety roles who work overtime, such as law enforcement personnel, for example—should be able to work overtime without taxes.
During National Police Week in May, groups advocating for law enforcement were on Capitol Hill, pushing for that provision, which did make it into the final bill. This means that public sector employers will likely need to clarify which members of their workforce could be covered, and plan for budgetary implications.
Ultimately, the overall impact of such provisions in the OBBA bill is that HR professionals at all levels of government are going to continue being asked to do more with less.
About the Author
Jason Briefel is a partner and the director of government and public affairs at Washington, D.C.-based Shaw Bransford & Roth. He can be reached at jbriefel@shawbransford.com.
07 August 2025
Category
HR News Article
