The One Big Beautiful Bill Act Weakens Anti-Recessionary Fiscal Policy
The following piece is being re-published to include language corrections.
The One Big Beautiful Bill Act (OBBBA), recently signed into law by President Trump, has received ample attention from critics for cutting funding for programs that support poor Americans to fund tax cuts for the wealthy. The business cycle implications of cuts to the safety net have been less discussed.
By targeting programs like Medicaid and the Supplemental Nutrition Assistance Program (SNAP), the OBBBA not only directly reduces support for Americans facing material insecurity, but it also heightens the risk and impact of a future economic downturn. Undermining the integrity of social safety net programs by cutting essential funding, restricting eligibility, and straining state budgets diminishes these programs’ automatic countercyclical effect on the business cycle. The result is greater vulnerability to recessionary outcomes.
Tighter State Government Budgets
The OBBBA significantly increases the financial burden on state governments by shifting more responsibility for SNAP and Medicaid onto the states. Under current law, states do not pay for SNAP food benefits and split administrative costs with the federal government, but the OBBBA will require states to cover a majority of administrative expenses and, in some cases, contribute to food benefit costs. This change would increase state spending on SNAP by 15% to 30%, depending on how accurately a state administers SNAP.[1] The bill also limits the ability of states to use provider taxes, a fee that states charge healthcare providers to help fund their share of Medicaid costs. [2] Provider taxes are especially important for safeguarding Medicaid funding during recessions, since states increase their use of provider taxes to fill the revenue gap when general funds decline. Unlike the federal government, most states must balance their budgets annually, and the majority of states rely on income and sales taxes to meet revenue requirements, both of which drop during economic downturns. As a result, the OBBBA’s cost shifts could force states to cut critical services or restrict access to Medicaid and SNAP just when families—and the broader economy—need them most, deepening the impact of future recessions.
Work Requirements Reduce Effective Safety Net Takeup
In addition to increasing the state’s fiscal responsibility, the OBBBA also imposes work requirements for Medicaid and tightens them for SNAP, requiring eligible participants to work at least 80 hours a month. As others have pointed out, conditioning Medicaid on work requirements increases administrative costs for both state agencies and applicants. Estimates suggest that the new work requirements could cause almost 15 million people to lose their health insurance and 5.4 million people to lose some or all of their monthly SNAP benefits.
Work Requirements Fail To Increase Employment
We’ve seen the effect of Medicaid work requirements during Trump’s first term, when states were allowed to implement pilot programs. Arkansas was the only state to fully implement and enforce work requirements under the pilot program for nine months before they were shut down by the courts. During that period, evidence showed that the work requirements increased the number of low-income adults without health insurance due to reporting challenges rather than actual ineligibility. And while one justification for the OBBBA’s work requirements was to encourage employment, the work requirements in Arkansas failed to increase employment.
Recessions Are Likely To Weigh Heavier On Consumption
In addition to jeopardizing the well-being of low-income individuals, this sharp reduction in access to essential benefits also undermines the macroeconomic stabilizing role of social safety net programs. These programs are specifically designed to support low-income households with food assistance and healthcare, especially during economic downturns when spending in grocery stores increases and many people lose access to employer-sponsored health insurance. As a result, enrollment in these programs naturally rises during recessions. The impact is not just support for individuals and households during economic hardship, but also automatic countercyclical support for broader aggregate demand during recessions.
Programs like Medicaid and SNAP are especially important from a macroeconomic perspective because they support the household budgets of those with the highest marginal propensity to consume, i.e., those whose consumption is most sensitive to changes in income. The OBBBA does more than remove support for those who rely on public assistance; gutting the social safety net weakens the ability of these programs to provide countercyclical fiscal support during recessions.
Endnotes:
[1] The payment error rate measures how accurately states administer SNAP. It does not measure fraud but rather administrative mistakes including overpayments and underpayments. The OBBBA requires states to pay a percentage of food benefit costs if their error rate is above 6%, in FY 2024, 44 states had payment error rates at or above the threshold.
[2] States are not supposed to hold providers harmless for the tax, meaning providers cannot be guaranteed to recoup the tax through Medicaid payments. To determine if a provider is being held harmless, they must not be taxed at a rate that is more than 6% of the net patient service revenues received by the provider. The OBBBA reduces the threshold for determining whether providers are “held harmless” from 6% to 3.5% in Medicaid expansion states, which currently includes 41 states including DC.