Heartland states on high alert over fiscal cliff

State and local officials in the U.S. heartland are steeling themselves for the possibility of a major loss of tax revenue, federal aid and grants next year.

By The Fiscal Times Nov 28, 2012 10:39AM
By Eric PianinThe Fiscal Times logo

In a recent call with reporters, Democratic Sen. Tom Harkin of Iowa signaled he was willing to let the country topple over the fiscal cliff unless President Obama and Congress strike a deal to force wealthy Americans to pay more in taxes and that protects Medicare and Medicaid from deep cuts.

“No deal is better than a bad deal, because things will change after Jan. 1, the positions will change,” Harkin explained. “Quite frankly, if we don’t get a good deal, we’ll just take it up in January or February."

But other Iowa officials have a less cavalier view of what would happen if Obama and congressional leaders fall short of negotiating an agreement to block the more than $600 billion of tax increases and spending cuts that are set to take effect beginning Jan. 2.

Iowa Gov. Terry Branstad told The Iowa Gazette that the potential impact to the Hawkeye State could be “grave.” The Republican governor noted that a sudden increase in the federal estate tax would hurt farmers and small businesses and that cuts in defense spending could lead to a loss of jobs at the Rockwell Collins aerospace and defense company in Cedar Rapids. In September, Rockwell Collins announced as many as 1,000 employees may have to be laid off, including 350 directly related to the potential federal spending cut and others due to declining defense spending.

Just as Washington policymakers and politicians are obsessing on the damage that the fiscal cliff poses to the national economy and jobs picture, state and local officials in the U.S. heartland are steeling themselves for the possibility of a major loss of tax revenue, federal aid and grants next year.

More from The Fiscal Times:
While practically every state is certain to experience some economic turmoil if the country tumbles over the fiscal cliff, Iowa is one of only six states that could suffer a double whammy of declining state revenues and a significant loss of federal aid. The Iowa Department of Revenue estimates that state income tax revenue could decline as much as $90 million during the first six months of 2013, and $200 million to $300 million during fiscal 2014 because of a quirk in the state’s tax code.

State programs, morever, would likely receive $52.9 million less than expected in the current year because of the automatic reductions in federal spending mandated under last year’s debt ceiling legislation, according to a recent study by the Iowa Legislative Services Agency.
State officials and analysts hasten to say that the revenue losses would be far from cataclysmic in a state that raises more than $4 billion annually in individual and corporate income tax revenue. Moreover, the reductions in federal aid would represent a relatively small percentage of the total annual amount.

Amid fears that the lethargic economy might slip back into a recession next year, the specter of declining state revenues and federal aid will greatly complicate the task of many state legislatures and governors in balancing their budgets while meeting essential needs, according to experts.

“It’s not going to wipe us out, but $200 million or more [of lost revenue next year] is a lot in the legislature when they’re trying to fund programs,”  Amy Harris, the Department of Revenue’s manager of tax research and program analysis, told The Fiscal Times. “So certainly one should pay attention, and we certainly need to consider that when budgets are being set.”

Many state officials had been counting on another good year of revenue growth and improving economic conditions after years of budget shortfalls throughout the Great Recession. But with parts of the East Coast devastated by Hurricane Sandy and the possibility of a year-end federal fiscal calamity, governors and state officials across the country are on high alert.

According to a new study by the Pew Center on the States, the general economic slowdown that would result from a combination of expiring tax-cut provisions and across the board defense and domestic spending cuts early next year would significantly affect state economic activity and indirectly undercut many state budgets.

Because federal and state finances are so closely intertwined, the tsunami of expiring Bush-era tax cuts and the budget cuts or sequester would hit the states in a multitude of ways. Most of them would either win or lose depending on the extent of their dependence on federal aid, grants and defense contracting, and the details of their state income tax laws.

For example, Iowa is one of six states that allow residents to deduct federal taxes from their income in filing state tax returns. The others are Alabama, Louisiana, Montana, Missouri and Oregon. These states stand to lose substantial state revenue if all the Bush-era federal tax cuts and other provisions expire by the end of the year. That’s because the more those residents are charged in federal taxes the less they pay in state income taxes.

”The amount of withholding that we get from employers and employees’ paychecks is a function of their wages and the amount of federal withholding,” Harris said. “So if federal withholding were to go up, ours goes down.”

Harris added that if Congress and the administration declines to extend a payroll tax cut that is also set to expire, “We estimate that is about a billion dollars less of disposable income for us during 2013, so that’s less spending and sales tax revenue. But the direct impact of course is through federal deductibility and withholding.”

Conversely, for the 43 states and the District of Columbia that levy a personal income tax, most of them would see an increase in revenues in the coming year if Obama and Congress allow the tax cuts and other deductions to expire. That’s because those states link their tax systems to the federal revenue code by adopting various federal definitions of income or various federal deductions and credits.

If the tax cuts are allowed to expire, that would mean – for example – the reinstatement of limits on some deductions for high-income taxpayers (estimated to increase 2013 federal revenues by $6.1 billion) and the elimination of the deduction for higher education tuition and fees (nearly $1 billion). Depending on a state’s tax code, lower federal deductions could automatically result in more income taxed at the state level as well, which would increase state revenue.

The bad news is that the more than $100 billion of automatic across-the-board spending cuts would deliver a serious blow to many states that have grown accustomed to substantial federal aid and procurement. This is particularly true in states such as Maryland, Virginia, New Mexico, Kentucky and Hawaii that are home to substantial defense industry facilities and military installations and that benefit from much higher than average federal spending.

In Iowa, the projected loss of an estimated $52.9 million a year would include $9.3 million in special education funding, $6.4 million in education funding for low-income students and $4.5 million for Head Start pre-school programs — roughly a 7.5 percent funding decrease in each program. But the overall loss in federal funding would be only about 2 percent. That’s because the lion’s share of federal aid to Iowa is Medicaid for the poor, which is exempt from the across the board cuts or sequestration.

“That said, when certain programs are hit harder than others, those programs could lay off one or two staff members or shut down a program completely to reallocate funds to a different area within that field,” explained Aaron Todd, a legislative analyst with the Legislative Services Agency. “So it does have real impact.” He added, “In terms of sequestration, we’re just kind of in the waiting mode. Like everyone else, we’re trying to read the tea leaves.”

Eric Pianin is the Washington Editor at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.



5Comments
Nov 29, 2012 10:40PM
avatar

save all the money you can because it's going to get harder to earn and the government is going to want a whole lot more from all of us.

 

I can't believe we as americans are following for this "we got to have more taxes" BS.

 

we have to go back to our roots where the government was in charge of national defense and not much else.

 

We will go out just like the romans, and the brits, and the greeks, and the italians, and the spanish and every other great political power in history if we don't stop the madness.  Obama spells disaster for the next 5o years.

Dec 3, 2012 10:57AM
avatar
Hang on ...Let's just go off the damn cliff, in 2-3 years we'll all be much better off
Dec 3, 2012 11:43AM
avatar

Everyone's seen this before but it is still true and a sure condemnation of where this country is headed.

 

Interesting List of Taxes that exist today

 

TAXES:

Accounts Receivable Tax

Building Permit Tax

Capital Gains Tax

CDL license Tax

Cigarette Tax

Corporate Income Tax

Court Fines (indirect taxes)

Dog License Tax

Federal Income Tax

Federal Unemployment Tax (FUTA)

Fishing License Tax

Food License Tax

Fuel permit tax

Gasoline Tax (42 cents per gallon)

Hunting License Tax

Inheritance Tax Interest expense (tax on the money)

Inventory tax IRS Interest Charges (tax on top of tax)

IRS Penalties (tax on top of tax)

Liquor Tax

Local Income Tax

Luxury Taxes

Marriage License Tax

Medicare Tax

Property Tax

Real Estate Tax

Septic Permit Tax

Service Charge Taxes

Social Security Tax

Road Usage Taxes (Truckers)

Sales Taxes

Recreational Vehicle Tax

Road Toll Booth Taxes

School Tax

State Income Tax

State Unemployment Tax (SUTA)

Telephone federal excise tax

Telephone federal universal service fee tax

Telephone federal, state and

local surcharge taxes

Telephone minimum usage surcharge tax

Telephone recurring and non-recurring charges tax

Telephone state and local tax

Telephone usage charge tax

Toll Bridge Taxes

Toll Tunnel Taxes

Traffic Fines (indirect taxation)

Trailer Registration Tax

Utility Taxes

Vehicle License Registration Tax

Vehicle Sales Tax

Watercraft Registration Tax

Well Permit Tax

 

Workers Compensation Tax

 

COMMENTS:

"Not one of these taxes existed 100 years ago and our nation was the most prosperous in the world, had absolutely no national debt, had the largest middle class in the world and only one parent had to work to support the family."

 

What happened?

Nov 29, 2012 9:45PM
avatar
Harkin said what they are all thinking.  They want it to go over the cliff.  Then they can work on it next year.
Nov 30, 2012 5:20PM
avatar

Boehner, we the Democrats, and million of conscientious Republican, and Independents will remember you for ever as the indolent persistent blocker of progress for our country, and we will work hard in the next elections in 2014, to kick you out of the House of Representatives. We will pursue this task with all our heart. Our prime future agenda is to consolidate our efforts to get you fast ejected in the next elections out of a job you did not know how to do efficiently, you did not earned it, and you do not deserved it as an American! We will make you invisible by jerking you out to never return because have done so much damaged to the American people, you destroyed  our credit ratings during the Budget Ceiling discussions  by so much indolent opposition against the president Obama. Unfortunately, for the people of America your negative actions quickly ricochet against the middle class, stopping their opportunity for job creations, better economics future, and less poverty. We still do not understand, and cannot mentally accept a man's in your position to work for America, to be so weak and wrong leading this mass of incoherent Tea Party nuts, and Republican members put there by the people to supposedly work for the people benefits, and for the people gains only, and not for monetary growth, and big publicity names in the House of Representatives. You made yourself a detestable inhuman, with no bipartisan abilities at all. We deeply feel sick just by listening to your bully unaccomplished voice always commanding nothing but despair, no jobs, no presidential Bills passed, only future poverty, and anti -health opposition for the citizens. You need to be put out of your job quickly to save America, and we can hardly wait for the next elections to do it! You and all of you have put us through misery, poverty, and no jobs, you have discredited our USA credit ratings by not wanting to increase the Debt Ceiling, but you kissed the rear of Bush, and increased the debt ceiling many times with no scruples or hesitation, it was because you adore this Republican man of poor and devastating presidential performance as worthless and reckless to be for ever remembered, just like yours!

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