Without a Cliff Deal, States Will Bleed Red Ink

November 21, 2012

The fiscal cliff is looming over the country as many states prepare for the economic impacts if Congress and the president are not able to negotiate a deal soon. According to a study by the Pew Center on the States, the economic slowdown would significantly affect state economic activity, as well as undercut many state budgets, say Eric Pianin and Brianna Ehley of the Fiscal Times.

Many states have or are in the process of making contingency plans. The expiration of many taxes, like the Bush tax cuts, as well as tax increases and spending cuts will affect states greatly.

  • Six states that allow residents to deduct federal taxes from their income in filing state tax returns would lose money once the Bush-era tax cuts expire because those residents have less to pay in state income taxes.
  • Conversely, 43 states and the District of Columbia will have an increase in revenues since people will have more income to be taxed.
  • Moreover, there will be lower federal deductions, which could result in more income being taxed at the state level.
  • Additionally, there will be a higher taxable corporate income.

High-income taxpayers can also expect a reinstatement of limits on some deductions if the tax cuts are allowed to expire.

Even though some states are expected to see a slight rise in revenue from the ability to generate more revenue from taxes, families are going to be hard hit and so will industries that supply important jobs for the economy. For example, the defense industry warned of massive layoffs if the cuts to the defense budget are to go through. Federal spending on defense comprises 3.5 percent of the total gross domestic product of states.

States like New Jersey and New York are in an especially difficult situation considering the toll that Hurricane Sandy has taken on their budgets. New Jersey residents may face higher tax bills as local governments exceed the 2 percent cap on annual increases to cover rebuilding costs.

Source: Eric Pianin and Brianna Ehley, "Without a Cliff Deal, States Will Bleed Red Ink," Fiscal Times, November 16, 2012.

 

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