By Nick Mann | 16 November 2012
US states could lose almost a fifth of their federal government funding if the ‘fiscal cliff’ takes effect in January 2013, the Pew Center on the States think-tank warned yesterday.
Federal grants constitute about a third of total state revenues. Some 18% of those funds would be cut under the fiscal cliff, the package of spending cuts and tax rises triggered automatically in the new year unless the US government agrees an alternative deficit reduction plan.
The automatic cuts, known as sequestration, amount to a fifth, or $98bn, of the $491bn fiscal cliff package. The remaining four fifths, or $393bn, will come from increased in revenue as long-term tax cuts expire.
Among the state programmes affected by the cuts would be funding for public housing, education and nutrition for families on low incomes, according to the Pew Center report, The impact of the fiscal cliff on the states.
The effect on individual states will differ according to the type and amount of federal grants they receive, the report said. For example, more than 10% of South Dakota’s income will be affected but less than 5% of Delaware’s.
Cuts in federal government spending on procurement, salaries and wages would also affect state economies in different ways, the Pew Center said. This type of spending amounts to almost 20% of the combined state gross domestic product of Maryland, Virginia and the District of Columbia, but only 1% of Delaware’s.
Defence is the largest area of federal spending on procurement, salaries and wages, amounting to 15% of Hawaii’s GDP but just 1% of Oregon’s and Minnesota’s.
Pew project director Anne Stauffer said it was important for those involved in discussions aimed at avoiding the fiscal cliff to take into account the implications for states.
‘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,’ she added.
The tax increases that will also take effect as part of the fiscal cliff will directly affect tax revenue in almost all states. However, the exact impact will depend on how a particular state’s tax system is linked to the federal tax code, the report said.
For at least 25 states and the District of Columbia, ending federal tax breaks would mean more income being taxed at state level as well, therefore increasing state tax revenues.
Similarly, the income of at least 30 states and the District of Columbia would increase because tax credits based on federal tax credits would be reduced.
But six states that allow taxpayers to deduct their federal income taxes from their state taxes would lose income, the Pew Center said.
US President Barack Obama met Democrat and Republicans from the Congress this week, as well as company chief executives and trade union leaders, in an attempt to reach the political agreement needed to avoid the fiscal cliff.
Analysts have warned that the full effect of the combined spending cuts and tax increases could send the US economy into recession.
