Where do federal funding cuts leave Indiana?

Federal funding cuts coming from Washington could threaten Indiana’s finances, especially for Medicaid and education. (Getty Images)

The state of Indiana receives more than $20 billion from the federal government annually, or 44% of its budget, and is the third-most reliant state — behind only Louisiana and Mississippi, according to an analysis from the left-leaning Center on Budget and Policy Priorities.

Under President Donald Trump, and top adviser Elon Musk, those dollars are at risk. Dozens of governmental departments and agencies, and their associated funding streams, have been slashed — complicating the state’s efforts to craft a two-year budget in the 2025 legislative session. 

In 2024, the State Budget Agency reported that Indiana received almost $23.4 billion from the federal government, with funds expected to stay relatively steady over the next few years. Over half of that funding, or $14 billion, went to Medicaid while the state Department of Education got nearly $1.8 billion. Another big earner includes the Division of Family Resources, which got $1.9 billion. 

Those education dollars primarily go to schools with a high number of low-poverty students or students with special education needs.

That $20-plus billion is roughly as much as the state of Indiana’s portion of spending from its general fund, which was $22.5 billion in 2024. In terms of non-government dollars, state revenues are expected to be modest-to-stagnant over the next two years. 

The current budget version making its way through Congress cuts Medicaid, a concern for several sitting lawmakers. One Democrat urged his colleagues to adopt his amendment creating a fund to buffer Indiana from potential changes — warning Republicans that a special session could be necessary if cuts go too deep. 

“We’re facing the eventuality of an enormous reduction in federal support’ we’re talking in the billions,” Rep. Ed. DeLaney told his colleagues from the House floor on Feb. 19. 

The Indianapolis Democrat listed some of the agencies receiving federal funding, including: public education, the Indiana National Guard, Medicaid, public health research, road construction, agriculture and veteran’s services. 

The amendment was rejected on a party-line vote, despite getting some Republican sympathy. 

“Where the federal government is going, we have no idea,” said Rep. Jack Jordan, R-Bremen, on Feb. 20 while praising the proposed state budget. “We have no idea what their thoughts are going to result in (or) how that’s going to affect us as a state.”

Earlier this week, however, Indiana’s governor seemed confident that Indiana’s finances could weather federal cuts. But planning around these forecasted — yet undefined — cuts did make crafting the state’s two-year budget “much harder,” said Senate Majority Leader Rodric Bray. 

“There’s so many unknowns,” said Bray, R-Martinsville. “And those are not small numbers … we’re talking about hundreds of millions of dollars, potentially.” 

Both Bray and his House counterpart, House Speaker Todd Huston, said that the federal government needed to get “their house in order” when it came to financing. 

“I don’t want to speculate on what those changes could be, but we’re certainly paying attention and watching,” said Huston, R-Fishers. “I’m for the federal government getting their financial house in order. If it has an impact on my life and our state — we’ve got to deal with that.”

The two Republican leaders flatly rejected the notion that Indiana might need to prepare itself for a special session later this year if federal funds fall too sharply. 

“I don’t have any interest in talking about a (special) session. At all,” Bray told reporters last week. “Full stop on that.” 

Medicaid funding

The Family and Social Services Administration, which oversees Medicaid, gets $16.8 billion of its $24.1 billion budget from the federal government, as outlined in its December budget presentation. 

That 70% includes dollars earmarked for Medicaid, which provides coverage for more than 1.9 million Hoosiers as of January.

Within Medicaid, a particular target for cost-cutting could be those Hoosiers covered by the Affordable Care Act. The Healthy Indiana Plan covers that expansion population in Indiana, paying for the medical care of more than 752,000 Hoosiers. 

The state covers its 10% share of those HIP costs using a combination of provider and cigarette taxes, rather than dipping into general funds. The federal government pays for the rest. 

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If that rate falls below that threshold, Indiana has a “trigger law” to end HIP — though one senator questions whether Indiana could truly end the program with that provision. 

Medicaid rolls could also be reduced by adding work requirements or additional eligibility checks — something that Indiana Senate Republicans advanced last week. In the first seven months after Arkansas imposed work requirements in 2018, 18,000 adults lost coverage. Some residents regained their coverage upon appeal. 

But red states, which are disproportionately older and poorer, will bear the brunt of Medicaid cuts. By 2030, an estimated one in five Hoosiers will be at retirement age, or at a point in their lives when they need additional health care coverage. So many retirees enroll in Medicaid that it’s the single largest payer of long-term care services like nursing homes and health aides. 

And while many politicos agree that Medicaid costs need to be reduced, slashing the program would have a wide-ranging impact, especially on the rural or critical access hospitals that serve primarily Medicaid patients. 

One-quarter of rural residents rely on Medicaid and nearly half of rural hospitals operate in the red, as written by researchers with Purdue University. Roughly half of Indiana’s births are covered by the government program and 38% of the state’s rural hospitals are at risk of closing. 

But Medicaid isn’t the only target. 

Other federal funds

Farmers, low-income renters and educators are already reeling from federal cuts.

Executive orders from the Trump administration paused and canceled funding for some programs that impact farmers — with billions of dollars at stake. That includes $20 billion for farmland conservation programs under the Inflation Reduction Act and the dismantling of the U.S. Agency for International Development. The latter purchases excess grains and goods from farmers for food programs abroad, which keeps domestic prices low for consumers without hurting producers. 

Additionally, Congress is two years late on reauthorizing the farm bill, with cuts to spending looming. 

USAID programming also supports research grants for the nations higher education institutes, such as the five-year $14.2 million Partnership for Higher Education Reform with Indiana University, which focuses on Vietnam. 

Educators relying on federal grants to fund their health research are scrambling after a temporary block to dollars from the National Institutes of Health. Based in Lafayette notes that Purdue University received $67.2 million in 2024, a fraction of the statewide total of $392.2 million. 

Much of that funding was flagged for Indiana University’s Indianapolis campus, which got $246.3 million. Purdue has set up its own tracking page for updates on federal funding as well as lawsuits. 

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The New York Times estimates that a proposed cap on grants means Indiana institutions could lose at least $68 million across 786 grants. 

Reporting last month implied that up to half of the staff with the Housing and Urban Development office could be eliminated. Programs under the agency strive to reduce homelessness and provide funding for Section 8 Housing Choice Vouchers, which subsidize rent for low-income Americans. 

Governing, which covers state and local governments, found that Indiana had 542 vouchers for every 100,000 residents in 2023. An estimated one in four eligible households use the program nationwide, or 2.3 million low-income families. 

Trump has targeted the federal Department of Education for elimination, which would fundamentally shift how public schools are funded throughout the country. In addition to the higher education research cuts, teacher training programs have also been slashed and employees with the Office for Civil Rights have been laid off. 

Western states prone to wildfires sounded the alarm, saying hiring freezes and other actions have threatened wildland firefighters and support personnel. Previously, disaster response and management was spearheaded by the federal government but Trump floated the possibility of putting the onus on states during California’s fires earlier this year. 

Indiana isn’t one of the largest recipients of disaster dollars, but did receive $23.7 million over the last seven years following severe storms and flooding.