Impact of “Fiscal Cliff on the States”

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  • #174120

    Henry Brown
    Participant

    IMO an excellent report from PEW Research Center which if provided some siginificant distribution MIGHT have some impact on the fine people in Washington trying to address this problem…

    Title: The Impact of the Fiscal Cliff on the States

    Executive Summary

    The “fiscal cliff,” a series of federal tax increases and spending cuts set to occur in January 2013, looms large in current fiscal policy debates. Discussions about the effect of the $491 billion in tax increases and spending cuts included in the fiscal cliff have focused on the national budget and economy. But federal and state finances are closely intertwined, and federal tax increases and spending cuts will have consequences for states’ budgets.

    There is a great deal of uncertainty about whether any or all of the policies in the fiscal cliff will be addressed temporarily or permanently, individually or as a package. Given this, it is useful to look at the different components of the fiscal cliff; examine how federal and state tax codes, revenues, budgets, and spending are linked; and provide a framework for assessing how states could be affected.

    For example, almost all states have tax codes linked to the federal code. When certain expiring tax provisions within the fiscal cliff are analyzed independently, they could increase state revenues.

    For at least 25 states and the District of Columbia, lower federal deductions would mean more income being taxed at the state level, resulting in higher state tax revenues.

    At least 30 states and the District of Columbia would see revenue increases because they have tax credits based on federal credits that would be reduced.

    At least 23 states have adopted federal rules for certain deductions related to business expenses. The scheduled expiration of these provisions would mean higher taxable corporate income and hence higher state tax revenues in the near term.

    Thirty-three states would collect more revenue as a result of scheduled changes in the estate tax.

    However, six states allow taxpayers to deduct their federal income taxes on their state tax returns. For these states, higher federal taxes would mean a higher state tax deduction, reducing state tax revenues.

    The scheduled spending cuts also would have a significant impact on states. Federal grants to the states constitute about one third of total state revenues, and federal spending affects states’ economic activity and thus their amount of tax revenues.

    Roughly 18 percent of federal grant dollars flowing to the states would be subject to the fiscal year 2013 across-the-board cuts under the sequester, according to the Federal Funds Information for States, including funding for education programs, nutrition for low-income women and children, public housing, and other programs.

    Because states differ in the type and amount of federal grants they receive, their exposure to the grant cuts would vary. In all, the federal grants subject to sequester make up more than 10 percent of South Dakota’s revenue, compared with less than 5 percent of Delaware’s revenue.

    Federal spending on defense accounts for more than 3.5 percent of the total gross domestic product (GDP) of the states, but there is wide variation across the states. Federal defense spending makes up almost 15 percent of Hawaii’s GDP, compared with just 1 percent of state GDP in Oregon. There is still a lot of uncertainty about how the fiscal cliff would affect states. States might amend their own tax codes in response to the federal tax changes. How across-the-board program cuts under the sequester would actually be implemented is still unclear. In addition, the effect on individuals from the tax increases and spending cuts will vary by state, and states will face difficult choices in addressing these impacts.

    Decisions will be made even amid this uncertainty. The public interest is best served by an enriched policy debate that incorporates implications for all levels of government and leads to long-term fiscal stability for the nation as a whole.

    Download PEW report

  • #174129

    Henry Brown
    Participant

    Press Release from PEW

    The “fiscal cliff,” a series of expiring federal tax provisions and scheduled spending cuts set to take effect in January 2013, will directly affect state budgets according to a new report, The Impact of the Fiscal Cliff on the States, released today by The Pew Center on the States. The study finds that the effects on the states from the fiscal cliff’s different tax and spending provisions vary greatly based on the degree states are tied to the federal tax code and federal spending.

    “To understand the full cost and benefits of proposals to address the fiscal cliff, policy makers need to know how federal and state policies are linked,” said Pew project director Anne Stauffer. “The implications for states should be part of the discussion so that problems are not simply shifted from one level of government to another.”

    Federal policy makers will very soon be faced with difficult decisions about whether and how to address several expiring tax policies and scheduled spending cuts. This report looks at the categories of policies that make up the fiscal cliff and addresses each of their potential impacts on the states.

    Scheduled tax changes account for roughly four-fifths—or $393 billion—of the total amount of the fiscal cliff. Because state tax systems are linked in various ways to the federal tax code, the changes would directly affect tax revenue in nearly all states. If certain federal taxes increase, state revenues in most instances would automatically increase as well:

    For at least 25 states and the District of Columbia, lower federal deductions would mean more income being taxed at the state level as well, resulting in higher state tax revenues.
    At least 30 states and the District of Columbia would see revenue increases because of tax credits based on federal tax credits that would be reduced.
    At least 23 states have adopted federal rules for certain deductions related to business expenses. The scheduled expiration of these provisions would give these states higher taxable corporate income and hence higher tax revenues in the near term.
    Thirty-three states would collect more revenue as a result of changes in the estate tax that would take effect at the beginning of 2013.

    However, six states allow taxpayers to deduct their federal income taxes from their state taxes. For these states, higher federal taxes would mean a higher state tax deduction, reducing state tax revenues.

    The scheduled spending cuts account for $98 billion—or about one-fifth—of the federal budget impact of the fiscal cliff. Over half of this amount is due to sequestration required under the Budget Control Act of 2011. Federal grants to states constitute about one-third of total state revenues, and 18 percent of these grant funds are subject to the sequester. Because states differ in the type and amount of federal grants they receive, their exposure to across-the-board cuts would vary significantly. For example, in 2010, federal grants subject to the current sequester were over 10 percent of South Dakota’s revenue, compared with less than 5 percent of Delaware’s revenue.

    Similarly, cuts in federal spending on procurement, salaries and wages would affect state economies in different ways. This type of spending accounts for almost 20 percent of the combined state GDP of Maryland, Virginia and the District of Columbia, compared with just over 1 percent for Delaware. Defense, which is the largest area of federal spending on procurement, salaries and wages, varies widely as well. For instance in 2010, federal defense spending made up almost 15 percent of Hawaii’s GDP, contrasted with only 1 percent of GDP in Oregon and Minnesota.

    If the full force of the fiscal cliff is realized, the federal deficit would be reduced by $491 billion. However, the Congressional Budget Office has projected that the entirety of the fiscal cliff would be a major driver of a general economic slowdown in 2013. Such an outcome would likely negate the more specific, separate impacts described in the paper.

    “Given the uncertainty about whether any or all of the policies in the fiscal cliff will be addressed temporarily or permanently, it is important to understand that the effects of the different components will vary across states,” said Stauffer.

    The Impact of the Fiscal Cliff on the States is the first report from a new Pew project looking at the federal-state fiscal relationship. It will examine the effects of federal spending, tax policy and regulatory decisions on the states to enrich policy debates about long-term fiscal stability at all levels of government.

  • #174127

    Henry Brown
    Participant

    News story from Christian Science Monitor:


    As Congress and President Obama continue to spar over how to avoid the looming fiscal cliff, most public attention has been focused on what tumbling over the edge would mean for the federal budget and the national economy. But the tremendous uncertainty over the threat of tax increases and cuts in federal spending could cause big problems for state budgets as well.

    Two new studies, one by The Pew Center on the States and another by the Tax Policy Center, show what falling over the cliff would mean for states. There is a sliver of good news: If all of the last decade’s tax cuts are allowed to expire, states might see a short-term boost in revenues. They might, that is, if the economy isn’t thrown back into recession.

  • #174125

    Henry Brown
    Participant

    If you have the inclination make sure you read the comments!

    From the Austin Texas Statesman:

    State officials grapple with effects of fiscal cliff

    By Tim Eaton

    If President Barack Obama and congressional Republicans cannot avoid tripping off the edge of the so-called fiscal cliff, then the Texas budget could be more than $1 billion short over the next two years.

    But fewer federal dollars flowing through the state budget would be just part of the problem for Texas.

    The state could feel an even bigger pinch because Texas is so dependent on other federal dollars associated with defense, homeland security and border protection, said Eva DeLuna Castro, senior budget analyst for Center for Public Policy Priorities.

    The potential for cuts to the state budget and to direct federal spending in Texas is serious enough that state lawmakers plan a hearing on the issue next week, with testimony invited from state agency officials and others about the possible impact.

    Federal spending in Texas is about one-fifth of the total economy, DeLuna Castro said. Based on 2010 figures, $226 billion federal dollars were spent in Texas. Social Security made up $43 billion of the spending; Medicare accounted for $16 billion, and defense spending totaled $59 billion, DeLuna Castro said.

  • #174123

    Henry Brown
    Participant

    This COMMENTARY is titled What the Fiscal Cliff Means for State and Local Budget;

    Will sequestration be a huge blow to local government budgets?

    No – at least not those cuts themselves.

    Direct federal aid is a very small portion of city budgets, representing only about 4.2 percent of municipal government revenue, according to the latest data from the Census. Sequestration would force automatic cuts of 8.2 percent in non-defense discretionary programs – the kind of programs like Community Development Block Grants, community policing grants, and workforce training grants that cities care about.

    Mayors have warned of the dire impact that losses to those programs might have. But the reality is that we’re talking an 8.2. percent cut to 4.2 percent of a city’s budget. In total, the loss would represent, on average, about one third of one percent of city revenue.

    That’s not to say cities are out of the woods completely. While mayors have emphasized the importance of federally-funded grants, the greater risk of the “fiscal cliff” would be broader damage to the economy. Cities are funded by property taxes, sales taxes and income taxes, all of which would suffer in the event of a double-dip recession triggered by the fiscal cliff. Cities are still reeling from the effects of the economic downturn, suffering their sixth consecutive year of revenue declines, and a double-dip recession would only exacerbate that challenge.

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