State Legislative Session Themes

1. Dedicated funding streams for kids remain popular, and the revenue sources keep expanding

This year states proposed dedicating at least a dozen distinct revenue sources to programs and services for children and youth. We saw states propose use of taxes on cash devices and skill games; vaping, nicotine, and tobacco products; and sugar-sweetened beverages to fund opportunities for children and youth. 

Most proposals did not pass, but four states had notable wins:

• Washington now sends 5% of its new tax on income over $1 million to the Fair Start for Kids Account. This will generate an estimated $320 million or more for child care in the first full two years of the initiative.
• Tennessee is newly taxing money wired out of the country and directed 18.5% of the tax proceeds to a new Promising Futures Fund for child care.
• Illinois dedicated a portion of its new social media platform fee to the Common School Fund.
• Connecticut directed $411.7 million in operating surplus into its Early Childhood Education Endowment, bringing the revenue available to distribute from the fund to more than $700 million.

Washington also became the latest state to expand local authority to generate and dedicate revenue to children's services at the city and county level.

• Washington enacted HB 2442, which authorizes counties and cities to impose local sales and use taxes of up to 0.01% if they dedicate those funds to child care, mental health, and family services—the kind of targeted local tool advocates for children have long sought.



For more information about dedicated state funding for children and youth, check out our report State Strategies for Sustained Investment in Kids: A Landscape of Dedicated Funding. Then watch your inbox for news about an updated version coming this fall!

2. Federal tax policy continues to assert fiscal pressure on states, and the choices states make will shape the funding available for kids.

When Congress passed major federal tax cuts in 2025, it forced many states to decide whether to follow suit and cut their own revenue, or protect their budgets. Massachusetts, North Carolina, and Arizona, among other states, are choosing to conform selectively, limiting the revenue hit in those states. But others face growing budget stress as federal funding for programs like Medicaid and the Supplemental Nutrition Assistance Program (commonly known as SNAP) shrinks. The bottom line: federal fiscal policy is now a major driver of state budget pressure, which directly impacts the dollars available for children’s programs.

3. Taxes on the wealthy gained ground through several different doors.

High earners and high-value assets were a favored target this session, and the approaches varied:

• Washington enacted a 9.9% tax on income over $1 million, directing 5% of it to child care.
• Rhode Island will phase in a surtax on income over $1 million over three years and adopted a rule taxing nonowner-occupied homes assessed above $1 million.
• California’s billionaire wealth tax (a one-time 5% levy on the state’s billionaires) qualified for the November ballot, meaning voters in that state will decide this fall if the state implements the new tax.

Not every effort succeeded though: proposals to tax millionaires to fund children’s services failed in Virginia and Connecticut, among others. But the mix of income surtaxes, second-home taxes, and outright wealth taxes shows advocates are reaching past the usual income-tax lever and, in Washington’s case, directing the new revenue to kids.

4. Digital technology taxes crossed from proposal to law.

Last year, the major “taxes on tech” story was Maryland's digital advertising tax tied up in litigation. This year, it’s that despite legal uncertainty, other states have moved to enact taxes on digital technology:

• Utah enacted a targeted digital advertising tax. 
• Illinois adopted a targeted tax on automated, data-driven digital ad placement systems.
• The Pennsylvania House of Representatives passed a 5% gross receipts tax on digital advertising (estimated to generate $500 million per year), but the state senate's tax omnibus bill dropped it.

States continue to update their tax codes to reflect the growing role of digital technology in the economy, whether through expanding existing tax bases or enacting innovative new taxes:

• California expanded its sales and use tax base to include digital products.
• Colorado HB 26-1223 expanded the sales tax base to cover most downloaded software and SaaS products, with revenue dedicated to a family affordability credit worth hundreds of dollars per child.
• Washington modified its surcharge on advanced computing businesses. 
• Illinois adopted a tax on digital asset transactions and a social media platform fee, with a portion of the latter dedicated to education.

Other states that attempted to tax digital technology did not pass legislation, but their efforts show a growing momentum among states to introduce these new taxes. For instance, a proposal in New Jersey would have imposed a surtax on the income of prediction market operators.

Meanwhile, backlash against data centers went bipartisan:

• Washington repealed its tax exemption for refurbished data centers.
• North Carolina rolled back a data center break in its enacted budget.
• Virginia added a first-in-the-nation electricity tax on data centers while keeping its exemption from state and local sales and use taxes.
• Arizona enacted a three-year moratorium on new data center sales tax exemptions (July 2026–June 2029), which the state estimates will generate $57 million in savings that it plans to direct toward child care, food assistance, and rural hospitals.
• Oklahoma enacted a Data Center Consumer Ratepayer Protection Act (HB 2992) that shields utility customers from data centers' infrastructure costs.
• Illinois directed its economic development agency to stop processing new data center tax deals beginning in July, after lawmakers didn't pass the governor's reforms.
• New Jersey froze a $250 million data center incentive program (grandfathering in an already-approved data center).
• Ohio HB 646 would cut the data center equipment sales and use tax exemption from 100% to 50%, cap property tax exemptions, and require performance guarantees from operators. It remains in a state senate committee, though. 
• Repeal efforts failed elsewhere: Georgia's governor vetoed a repeal. (The state’s sales and use tax exemptions for data center equipment now run through 2033). Meanwhile, Maine's governor vetoed a first-of-its-kind moratorium that would have paused new data center development or new exemption certificates in the state.

5. The trend of states continuing to look at ways to cut property taxes is the dominant structural threat to local efforts to generate dedicated and sustainable funding for children and youth.

Because property tax levies are the primary local instrument for children's funding, this trend matters a lot:

• Ohio enacted a five-bill package that caps levy growth, folds emergency and substitute levies into an existing 20-mill floor, prohibits new emergency and substitute levies entirely, and empowers county budget commissions to reduce levies voters have already approved.
• Indiana's SEA 1 cuts an estimated $263 million from cities and $536 million from school districts.
• Florida approved a plan to phase out homestead property taxes—the most consequential threat to local property taxes—that goes before voters in November. 

6. Local taxing authority is being squeezed from two directions—not just property tax cuts.

While the property tax rollback trend typically gets the most attention, there is a second, quieter threat: states are restricting what local governments can tax at all. Two examples stand out from this year’s legislative sessions:

• California lawmakers passed a resolution putting to voters a constitutional amendment that would raise the bar for local special taxes from a simple majority to a two-thirds vote. This change would make it significantly harder to pass the kind of dedicated local levies that fund child care and youth services.
• Illinois went further, directly barring home rule governments from taxing digital advertising or cryptocurrency, closing off emerging revenue sources before local governments could try them.