Many states and localities face chronic budget shortfalls that are plugged by either cuts in services or tax increases. With the passage of the One Big Beautiful Bill Act (P.L. 119-21) and billions in federal funding to states being withheld by the Trump administration, state and local budget shortfalls are unsurprisingly expected to balloon in 2026 and beyond. Jurisdictions anticipating revenue shortfalls include:
- California, estimating an $18 billion budget shortfall for fiscal 2026-2027;
- Chicago, projecting a $1.15 billion budget shortfall for fiscal 2026;
- Nebraska, facing a $432 million budget shortfall as a result of state tax cuts and decreases in federal funding;
- North Carolina, facing a nearly $3.5 billion budget shortfall in the coming years as a result of state tax reductions and decreases in federal funding;
- New York state, estimating a $34.3 billion budget shortfall through fiscal 2029;
- New York City, estimating a $2.18 billion budget shortfall for fiscal 20265; and
- Washington, projecting a $16 billion, four-year budget shortfall.
In addition to cutting services and increasing taxes, jurisdictions also work to plug their budget shortfalls by increasing audit activities. In 2026 this task will be easier thanks to a large influx of former IRS auditors who recently joined state and local revenue agencies.
To read the full article, please click here (subscription required).
"Planning for Aggressive Audits in the Wake of Budget Shortfalls," by Craig B. Fields and Melanie L. Lee was published in Tax Notes on January 5, 2026.
