If the federal fiscal cliff is not addressed it would have a mixed impact on states, the Pew Center on the States reports.
In its report, “The Impact of the Fiscal Cliff on the States,” the center explains how the effects will “vary greatly based on the extent to which states are tied to the federal tax code and federal spending.”
The “fiscal cliff” is a series of federal taxing and spending measures that are set to start at the beginning of 2013 and would generally raise federal taxes and lower federal spending.
Almost all the states have tax codes linked to the federal code, the report states. If fiscal cliff measures go into effect:
• “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 credit 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.” On the federal level the expiration would lead to $42 billion in additional federal revenues.
• “Thirty-three states would collect more revenue as a result of scheduled changes in the estate tax.”
• “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.”
However, the fiscal cliff would not simply be a blessing for state governments. Federal grants to these governments make up about one third of these governments’ revenues.
The planned sequester of federal spending would cut some of this grant money. The overall national average of federal nondefense grants subject to sequester as a percentage of state revenue would be 6.6%. “Because these cuts would not take effect until January 2013, three months into the federal fiscal year, the impact of the cuts could be greater than they would be if they were spread over a full 12 months,” Pew states.
However, this would vary from 10.3% of revenue in South Dakota to 4.8% in Delaware.
Federal defense spending accounts for more than 3.5% of state gross domestic product. There is wide variation in how much federal defense spending accounts in states’ gross domestic product, from 15% in Hawaii to 1% in Oregon.
“The general economic slowdown that could result if the full fiscal cliff were allowed to take effect would likely overwhelm any of the separate components discussed here,” the report states.
The report’s projections assume the continuation of existing state tax policies but it is possible that “states might amend their own tax codes in response to the federal tax changes.” The implementation of the sequester cuts also would play a role in how much impact various states feel.
The Pew report specifies how each of the fiscal cliff effects will affect each state.