States Face Billions in Losses Under Deportation-Focused Federal Budget Bill
The House-passed budget measure threatens to gut Medicaid funding for states covering undocumented immigrants, while New Jersey cities battle DOJ lawsuits.
WASHINGTON — The Trump administration is escalating its crackdown on states and cities that provide services to immigrants without legal status, advancing a two-pronged effort to reshape national immigration policy through both federal legislation and the courts.
On Capitol Hill, House Republicans narrowly passed a sweeping budget bill last week that would penalize states for using their own funds to insure unauthorized immigrants through Medicaid. The measure — dubbed the “One Big Beautiful Bill” — would slash federal Medicaid reimbursements to 15 states and Washington, D.C., by billions of dollars unless they roll back benefits for immigrants lacking legal status.
At the same time, the U.S. Department of Justice filed suit Thursday against four Democratic-led New Jersey cities, alleging that their “sanctuary” policies obstruct federal immigration enforcement and violate the Constitution’s supremacy clause.
Together, the moves underscore the administration’s renewed focus on curtailing immigration through state-level disincentives and legal challenges to local resistance.
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Bill Would Cut Medicaid for States Covering Undocumented Immigrants
The budget bill passed the House largely along party lines and now heads to the Senate, where it faces uncertain prospects. If enacted, it would reduce federal matching funds from 90% to 80% for any state that provides Medicaid coverage — even using its own money — to individuals without legal immigration status.
According to the nonpartisan KFF, California alone stands to lose as much as $3 billion annually. Other major losses would fall on New York ($1.6 billion), Illinois, and several other states that have opted to extend coverage to undocumented populations, especially children and pregnant individuals.
The cuts target states that expanded Medicaid under the Affordable Care Act and used state dollars to fill gaps for immigrant populations ineligible for federal funding. By law, federal Medicaid dollars cannot directly support coverage for unauthorized immigrants except in limited cases, such as emergency or pregnancy-related care.
“We need to stand our ground,” said California Democrat State Sen. Scott Wiener, chair of the Senate budget committee. “California has made a decision that we want universal health care, and we are going to ensure that everyone has access.”
California Gov. Gavin Newsom warned the cuts would force the state to reduce services. “Millions will lose coverage, hospitals will close, and safety nets could collapse,” he said in a statement.
Critics say the bill is a politically motivated attack on Democratic states that contradicts the federalist principle of allowing states to use their own resources to meet local needs.
However, House Speaker Mike Johnson (R-LA) defended the measure, calling state-funded programs that cover unauthorized immigrants an “open doormat” that incentivizes illegal border crossings. He cited polling that shows nearly half of Americans support Trump’s immigration policies.
The bill also includes work requirements for Medicaid recipients and mandates more frequent eligibility checks, which the Congressional Budget Office projects would lead to 8.6 million people losing coverage by 2034 — a number expected to rise to 14 million if ACA subsidies are not renewed.
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Justice Department Sues Four New Jersey Cities Over ‘Sanctuary’ Policies
In a separate move, the Justice Department filed suit against Newark, Jersey City, Paterson, and Hoboken, accusing the cities of blocking cooperation with federal immigration authorities. The complaint, led by acting Assistant Attorney General Yaakov Roth, alleges that city directives prohibiting local law enforcement from coordinating with federal immigration agents violate federal law.
“Where inaction crosses into obstruction, local governments break federal law,” the suit reads. “That is what is happening across New Jersey right now. It is past time it ends.”
The lawsuit names mayors Ras Baraka (Newark), Steve Fulop (Jersey City), Andre Sayegh (Paterson), and Ravi Bhalla (Hoboken), all Democrats. Baraka and Fulop are candidates in New Jersey’s 2025 gubernatorial race.
Baraka dismissed the suit as “absurd,” saying his city is upholding constitutional protections and state law. “What we refuse to do is turn our city into an arm of federal immigration enforcement,” he said.
Fulop accused the administration of using the courts for political retribution. “Jersey City’s policies protect families, reflect our values, and have led to record low crime rates,” he said in a statement.
The legal clash comes weeks after federal agents began detaining immigrants at a new 1,100-bed jail in Newark. The facility has faced protests and scrutiny over lack of oversight. Baraka was arrested earlier this month for attempting to inspect the jail. Charges were later dropped.
Immigration advocates called the lawsuit an intimidation tactic.
“This is a clear attempt by the DOJ to bully local governments into abandoning immigrant communities,” said Amy Torres, executive director of the New Jersey Alliance for Immigrant Justice. “But we won’t be intimidated.”
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A Broader Strategy Ahead of 2026 Elections
Analysts say the Medicaid cuts and New Jersey lawsuits are part of a broader strategy to nationalize immigration enforcement through fiscal pressure and legal compulsion — a hallmark of President Trump’s second-term agenda.
Though proponents argue the federal government has a duty to ensure uniform immigration policy, opponents say the administration is leveraging economic penalties and court battles to punish states and cities that diverge from its vision.
“It’s a prisoner's dilemma,” said Matt Slonaker, executive director of the Utah Health Policy Project. "There are no great alternatives, politically — a move in either direction does not make much sense."
Slonaker said states like Utah — which has a Medicaid trigger law that ends expansion if federal support is reduced — face impossible trade-offs.
Advocates in Illinois, which covers nearly 800,000 people under Medicaid expansion, said the state might repeal its trigger law or seek local workarounds if forced to choose between cutting immigrant coverage or losing federal dollars.
Stephanie Altman, policy director at the Shriver Center on Poverty Law, said the legislation and lawsuit combined reveal the administration’s larger intent.
“They’re sending a message,” she said. “If you stand up for immigrants, we’ll come for your budgets, and we’ll see you in court.”