Across the country, state leaders entered the 2026 legislative session facing a familiar but increasingly urgent challenge: how to sustain investments in children and youth as budgets tighten.

Federal relief dollars that helped stabilize systems during the pandemic have largely expired. Meanwhile, the federal budget legislation known as H.R. 1 that passed last summer, which reduced federal revenue, also reduced federal aid to states and put additional pressure on state budgets. At the same time, many states are seeing slowing revenue growth and rising costs across education, child care, and health systems. The result is a growing gap between what children and families need and what current revenue structures can support.

As we noted in our state legislative preview blog last month, policymakers are already responding by pursuing new dedicated funding strategies to protect and expand services for children and youth. But it is also important for children and youth advocates to join efforts to pursue broader general revenue and “grow the pie” of available funding for all core social services while reducing competition among them.

States Look to Raise Revenue

While debates over tax cuts and spending reductions continue in many states, there is also a clear legislative trend emerging that focuses on strengthening revenue systems.

Many states are turning to excise taxes to generate revenue as budgets tighten. Lawmakers are proposing increases on tobacco and nicotine products in states like Utah and Arizona, while others, including Georgia and Mississippi, are looking to legalize and tax online sports betting or cannabis markets. States such as Connecticut and Vermont are considering taxes on sugar-sweetened beverages. 

Other states are looking to raise revenue in more equitable ways.

Several states are considering or advancing policies that increase taxes on high-income households. For example, Connecticut lawmakers have proposed both a 4% tax on income above $1 million and increases to the top marginal tax rate. And both Washington and Rhode Island are also advancing similar proposals to create new taxes on high earners making more than $1 million. These approaches are designed to generate revenue while minimizing impacts on low- and middle-income families. 

Corporate tax policy is another major area of activity. Other states, like Pennsylvania and Hawaii, are proposing policies that close tax loopholes which allow corporations to artificially reduce their taxable income. Several other states, meanwhile, are pursuing efforts to decouple their state tax code from the recent tax changes contained in the federal H.R. 1 legislation that would otherwise reduce state revenue.

“Rather than relying primarily on cuts to balance budgets, some states are looking to generate revenue.”

Most of the tax examples above relate to income. But extremely wealthy individuals can find ways to reduce their taxable income each year. That’s why some states are going further by exploring taxes on wealth itself. Illinois lawmakers have introduced a billionaires’ wealth tax, Maryland is considering a one-time tax on billionaires, and Oregon and Rhode Island are advancing proposals to tax large asset holdings or intangible wealth. These proposals reflect a growing recognition that wealth has become increasingly concentrated and that state tax systems often do not fully capture that growth.

States are also revisiting how investment income is taxed. Connecticut has proposed a capital gains surcharge on high-income taxpayers, while Hawaii is considering increasing capital gains tax rates. Policies that increase taxes on capital gains or apply surcharges to high levels of investment income aim to better align the taxation of wealth with the taxation of wages.

Taken together, these strategies reflect a broader shift: rather than relying primarily on cuts to balance budgets, some states are looking to generate revenue.

Why This Matters for Children and Youth

Revenue decisions have direct consequences for children and families.

The health of state budgets influences whether communities can expand access to child care, invest in early learning, strengthen K–12 schools, and support youth programs that promote long-term well-being. When revenue falls short, these are often the very areas that face cuts, delays, or underinvestment.

“Revenue decisions have direct consequences for children and families.”

States that are looking to raise revenue offer a different path for supporting children and youth. By raising state funds, states can reduce pressure to cut essential services that disproportionately impact children and families.

A Critical Moment for Advocacy

States are at a crossroads. They can continue to rely on approaches that constrain revenue and limit their ability to invest in children or they can pursue strategies that raise revenue more equitably and support long-term investments in the programs and services that help children thrive.

That makes this a critical moment for children’s advocates to engage with their state legislators. 

Too often, tax policy debates are framed primarily in terms of economic competitiveness, and discussions about business climate overemphasize tax burden while underweighting the importance of quality of life and workforce support in a state’s ability to attract and retain businesses. Advocates bring an essential perspective to these legislative conversations by connecting revenue decisions to real-world outcomes for children and families. Whether it’s access to affordable child care, the quality of schools, or the availability of youth programs, the link between revenue and societal impact is clear.

In a challenging fiscal environment, the choices states make about how to allocate their dollars matter more than ever.

Bruno Showers is state policy manager at Children’s Funding Project.