In their annual speeches and budget proposals, state leaders have made one of their priorities clear for the next fiscal year: They want to rewrite tax laws.
What governors are proposing varies widely by state, from eliminating personal income taxes to targeting specific areas such as sports betting for increased levies, an analysis by the National Association of State Budget Officers finds.
The proposed changes to state tax laws add a layer of volatility for school districts — and by extension, for the companies serving them — at a time when the Trump administration is threatening to cut the federal share of K-12 aid, if state and local officials don’t comply with its agenda.
Some education advocates have said it’s possible that state and local governments could be left with a heavier share of education costs, if federal officials pull back.
Governors’ promises to adjust tax codes aren’t as sweeping as the ideas floated a couple of years ago, when revenues were growing post-pandemic and a number of states passed tax cuts or offered taxpayers rebates, said Brian Sigritz, director of state fiscal studies for NASBO.
The smaller scope reflects the reality that states are facing tighter budgets with slower revenue growth, increased spending demands, and the end of federal COVID aid, he said.
But any change to tax collections can impact the pool of money that is available to fund K-12 schools.
“We’re definitely entering into an environment of tighter state spending,” Sigritz said. “States are having to live within their means and make decisions about what areas to prioritize. K-12 will be impacted in that regard.”
Which States Are Considering Tax Cuts?
Some governors, including those in Maine, Maryland, New Jersey, and Rhode Island, have discussed increasing so-called “sin taxes” on goods and activities — including cigarettes, marijuana, and gambling — as a way to boost state revenues, according to NASBO.
Other governors in states including Georgia, Mississippi, Utah, and Tennessee, meanwhile, have signaled their intention to cut back some taxes, promising to offer relief to their constituents.
In Utah, for example, Republican Gov. Spencer Cox’s state budget proposal would eliminate state taxes on Social Security income. Tennessee lawmakers are considering a reduction in the administrative fees the state collects on taxes. And Georgia is aiming to lower the income tax rate.
Perhaps most notably, Mississippi Republican Gov. Tate Reeves released a 2026 budget recommendation that takes the first steps toward eliminating state income tax entirely by 2029.
Critics of the idea — which would reduce state revenues by about $1 billion — have called it irresponsible, saying Mississippi’s budget is in a strong position now because of one-time pandemic-era aid which will not continue, and raising concerns about the impact, including on school funding.
Sigritz said the efforts to cut different categories of taxes aren’t necessarily identifiable with one political party.
“I’ve seen both red and blue states looking at increasing cigarette taxes or vaping or marijuana,” he said.
Can States Cover Federal K-12 Losses?
Changes to taxes at the state level, in general, have direct implications for K-12 schools because the vast majority of district funding in the U.S. comes from either state or local revenues. The federal government contributes about 10 percent of total money for pre-college education.
Each state has its own formula for distributing its pool of tax revenue — typically a combination of income and sales taxes — out to school districts. Those dollars, combined with local sources of funding, then make up a district’s budget for operations, salaries and benefits, and instructional materials.
Both state and local sources may be especially critical in the coming fiscal year as some school districts brace for fallout from the Trump administration broad attempt to change federal education policy.
One of the most immediately concerning issues for school budgets is the recent federal warning to districts that their federal Title I dollars would be withheld if they don’t fall in line with the administration’s preferred restrictions on DEI.
Another source of worry is the abrupt cancellation of the extensions that states and districts were previously granted for spending the last of their education-focused stimulus dollars.
A recent EdWeek Market Brief survey found that the top priorities for districts in spending Title 1 aid was on reading programs, followed by paraprofessional staff, math programs, and high-dosage tutoring.
However, even in states where lawmakers are considering tax increases, school districts will likely still feel the effects of potential cuts coming from the federal level. State budgets won’t be able to make up for losses in federal funding, , Sigritz said.
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“The magnitude of the federal cuts that are being discussed can’t be absorbed by states,” he said. “And with federal cuts, the impacts are cumulative.”
That leaves states with a few options, Sigritz said: cutting benefits for certain programs, cutting areas of spending, or — taking the opposite approach — raising taxes. Or a combination of the three.
“Those are the kind of choices that states are going to have to look at making,” he said.