|What Will Falling Off the Fiscal Cliff Mean for Your State?|
By Ashton Ellis
Wednesday, December 05 2012
With all the attention centered on the fallout in the federal budget should President Barack Obama and Congressional Republicans fail to cut a deal that avoids the fiscal cliff, it’s easy to forget that the budgets of most state governments will be heavily impacted as well.
To recap, Congress and the President are facing two separate yet related issues. The first is the expiration of the Bush era tax cuts, as well as a temporary reduction in the payroll tax. Congressional Republicans want to extend the cuts for all taxpayers, and would probably be willing to extend the payroll tax holiday. President Obama and the Democrats would let the Bush tax cuts expire on individuals making more than $200,000, and couples making more than $250,000, annually. They, too, would likely extend the payroll holiday.
The second fiscal issue is spending. When the debt ceiling was raised in the summer of 2011, January 1, 2013 was set as the day automatic, across-the-board spending cuts would hit the federal government. Every department, including Defense, will be cut 10 percent, unless Congress and the President agree on substantial spending reductions. So far, House Speaker John Boehner (R-OH) has proposed $800 billion in cuts. President Obama and the Democrats want at least $1 trillion in new taxes.
As usual, Republicans are focusing on spending reductions, while Democrats want tax increases. Constituencies on both sides are fretting over indiscriminate cuts to their preferred programs, as well as the harmful effects the other side’s policies will allegedly visit on the national economy. Lost in the punditry is any sense of how the decisions made in Washington, D.C., will impact state budgets.
According to a study by the Pew Center on the States, “almost all states have tax codes linked to the federal code.” Thus, any change in the Bush tax cuts – expiration, extension or a combination of the two – will change the amount of taxes states collect. For example, 25 states will get more in taxes if federal deductions are lowered because then more income will be available to tax at the state level. Thirty states will see similar revenue benefits if the value of federal tax credits are reduced because of state credits that would also shrink. And 33 states will capture more money if scheduled changes in the estate tax take place.
Pew’s state-by-state fact sheets make it possible to compare how individual states will be impacted by changes in federal policy.
Changes to the federal tax code could be a windfall for states addicted to deficit spending. California will get more inheritance taxes if the federal estate tax rises. New York’s treasury will swell if federal tax deductions for businesses and popular tax credits for individuals – such as the Earned Income Tax Credit and the Child and Dependent Care Credit – are reduced or eliminated.
Other than seeing revenue increases because of a rising estate tax, states like Texas and Florida would largely be unaffected by changes in federal income tax policy because those states have no personal income tax. Therefore, they have no link to the federal income tax code.
But that isn’t to say low-tax states like Texas and Florida won’t be impacted by looming federal spending cuts. As of 2010, 4.1 percent of Texas’ GDP comes from federal defense spending on procurement, salaries and wages. This is a higher level of dependence on military spending than the 3.5 percent national average, according to the Pew study.
Florida could also take a financial hit. There, 7.2 percent of the state’s 2010 revenue depended on federal grants subject to sequester, almost a full half percent higher than the 6.6 percent national average.
Even though governors Rick Perry in Texas and Rick Scott in Florida have been valiant in holding the line on state spending, cuts in federal spending could make it very difficult to resist calls for higher state taxes to make up for the lost revenue.
But there is evidence that Perry, Scott and some of the 28 other Republican governors are willing to start the difficult process of accepting reduced federal aid in order to reduce state dependence on federal spending. At the Republican Governors Association convention in Las Vegas shortly after the presidential election, Byron York reported that many GOP governors are ready to refuse ObamaCare’s Medicaid expansion as a way to reassert control over their states’ fiscal future.
Such a stance won’t be easy, but it is necessary if deficits at any level of government are going to be reined in. Those in Washington, D.C., negotiating routes around the fiscal cliff no doubt need to find a statesmanlike solution to the current problems plaguing our economy. But the long-term fix will depend on the courage of state-level executives to refuse federal money. Their states’ sovereignty, and solvency, depends on it.
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