pew report on fiscal cliff

7/30/2019 Pew Report on Fiscal Cliff

1/37PEW CENTER ON THE STATES FiSCAl FEdERAliSm iNiTiATivE

TheImpacTof The

fIscal clIffon The sTaTes


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NoVeMBer 2012

The Pew Center on the States is a division of The Pew Charitable Trusts that identifies andadvances effective solutions to critical issues facing states. Pew is a nonprofit organizationthat applies a rigorous, analytical approach to improve public policy, inform the public, andstimulate civic life.

The Pew Fiscal Federalism Initiative examines the federal-state relationship and the impactof federal spending, tax policy, and regulatory decisions on the states to enrich policy debatesabout long-term fiscal stability at all levels of government.

PEW CENTER ON THE STATES

Susan K. Urahn, managing director

Ingrid Schroeder Anne StaufferLori Metcalf Kasia ONeill Murray

Mark RobynSam Rosen-Amy

Andreas Westgaard John Burrows

ACKNOWlEdGmENTS

Valuable research support was provided by Sarah Babbage, Sara Bencic, Kavita Choudhry, SaraDube, Diana Elliott, and Kil Huh. We would like to thank Gaye Williams, Scott Greenberger,

Jeremy Ratner, Carla Uriona, Evan Potler, Frederick Schecker, Jennifer Peltak, and JenniferDoctors for providing valuable feedback and production assistance on this report.

The Urban-Brookings Tax Policy Center provided research on the tax sections as well asvaluable feedback and guidance throughout the project.

This report benefited tremendously from the insights and expertise of five external reviewers:Ronald Alt, senior manager-economic and policy research, Federation of Tax Administrators;former state budget director John Cape and former state budget director Randy Bauer,managing director and director, Public Financial Management Inc.; Robert Dennis, formerassistant director, Macroeconomic Analysis Division of the Congressional Budget Office; and

Victor J. Miller, former director, Federal Funds Information for States. These experts providedfeedback and guidance at critical stages during the project. Although they have reviewed thereport, neither they nor their organizations necessarily endorse its findings or conclusions.

For additional information on the Pew Charitable Trusts and the Fiscal FederalismInitiative, please visit www.pewtrusts.org or email us at [email protected].

This report is intended for educational and informational purposes. References to specific policy makersor companies have been included solely to advance these purposes and do not constitute an endorsement,sponsorship or recommendation by The Pew Charitable Trusts.

November 2012 The Pew Charitable Trusts. All Rights Reserved.

901 E Street NW, 10th Floor 2005 Market Street, Suite 1700 Washington, DC 20004 Philadelphia, PA 19103
http://www.pewstates.org/http://www.pewstates.org/


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Co e sExecutive Summary 2

The Fiscal Cliff 5

Table 1: Deficit Reduction Resulting from the Fiscal Cliff 7

The Scheduled Tax Changes 9

Table 2: Direct Impact of the Fiscal Cliff on State Tax Revenues 15

The Scheduled Spending Changes 18

Table 3: Estimated Cuts Resulting from Sequestration 19

Figure 1: Federal Grants Subject to Sequester as a Percentage of State Revenue 21

Figure 2: Total Federal Spending on Procurement,Salaries, and Wages as a Percentage of State GDP 22

Figure 3: Federal Defense Spending on Procurement,Salaries, and Wages as a Percentage of State GDP 23

Figure 4: Federal Nondefense Spending on Procurement,Salaries, and Wages as a Percentage of State GDP 24

Figure 5: Federal Nondefense Workforceas a Percentage of Total Employed in State 25

Table 4: Selected Indicators of States Potential Vulnerabilities to Spending Cuts in the Fiscal Cliff

27Endnotes 28


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E ec e SThe fiscal cliff, a series of federal taxincreases and spending cuts set to occurin January 2013, looms large in currentfiscal policy debates. Discussions aboutthe effect of the $491 billion in taxincreases and spending cuts included inthe fiscal cliff have focused on the nationalbudget and economy. But federal andstate finances are closely intertwined, andfederal tax increases and spending cutswill have consequences for states budgets.

There is a great deal of uncertainty aboutwhether any or all of the policies in the

fiscal cliff will be addressed temporarilyor permanently, individually or as apackage. Given this, it is useful to lookat the different components of the fiscalcliff; examine how federal and state taxcodes, revenues, budgets, and spendingare linked; and provide a framework forassessing how states could be affected.

For example, almost all states have taxcodes linked to the federal code. Whencertain expiring tax provisions within thefiscal cliff are analyzed independently, theycould increase state revenues.

n For at least 25 states and theDistrict of Columbia, lower federaldeductions would mean moreincome being taxed at the state level,resulting in higher state tax revenues.

n At least 30 states and the Districtof Columbia would see revenueincreases because they have taxcredits based on federal credits thatwould be reduced.

n At least 23 states have adoptedfederal rules for certain deductionsrelated to business expenses. Thescheduled expiration of theseprovisions would mean highertaxable corporate income andhence higher state tax revenues inthe near term.

n Thirty-three states would collectmore revenue as a result of scheduledchanges in the estate tax.

However, six states allow taxpayers todeduct their federal income taxes on theirstate tax returns. For these states, higherfederal taxes would mean a higher state taxdeduction, reducing state tax revenues.


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ExECutivE Summary

The scheduled spending cuts also wouldhave a significant impact on states. Federalgrants to the states constitute about one-third of total state revenues, and federalspending affects states economic activityand thus their amount of tax revenues.

n Roughly 18 percent of federal grantdollars flowing to the states wouldbe subject to the fiscal year 2013across-the-board cuts under thesequester, according to the FederalFunds Information for States,including funding for educationprograms, nutrition for low-incomewomen and children, publichousing, and other programs.

n Because states differ in the type andamount of federal grants they receive,their exposure to the grant cutswould vary. In all, the federal grantssubject to sequester make up more

than 10 percent of South Dakotasrevenue, compared with less than 5percent of Delawares revenue.

n Federal spending on defenseaccounts for more than 3.5 percentof the total gross domestic product(GDP) of the states, but there iswide variation across the states.Federal defense spending makes upalmost 15 percent of Hawaiis GDP,compared with just 1 percent of stateGDP in Oregon.

There is still a lot of uncertainty abouthow the fiscal cliff would affect states.States might amend their own tax codes inresponse to the federal tax changes. Howacross-the-board program cuts under thesequester would actually be implementedis still unclear. In addition, the effect onindividuals from the tax increases andspending cuts will vary by state, and stateswill face difficult choices in addressingthese impacts.

Decisions will be made even amid thisuncertainty. The public interest is bestserved by an enriched policy debate thatincorporates implications for all levels of government and leads to long-term fiscalstability for the nation as a whole.


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t e F sc C ff America is speeding toward a fiscalcliff, a series of expiring tax policiesand spending cuts set to take effect in

January 2013. Decisions about whetherto extend the tax provisions and repealthe spending cuts or to allow the entireor any part of the fiscal cliff to occur willhave implications for an increasinglyunsustainable federal deficit and debtand a fragile economic recovery. Therepercussions for states and theireconomies are less discussed but relevantin considering the full costs and benefitsof these policy choices.

The federal debt currently stands at 73percent of GDP, the highest level since1950. 2 Allowing the fiscal cliff to occurwould achieve $491 billion in deficitreduction in fiscal year 2013 3 alone, notincluding the lower interest paymentson the debt that would result fromthis amount of deficit reduction (see

Table 1). In the short term, however,the Congressional Budget Office (CBO)projects that if the expiring tax policiesare not extended and the scheduledspending cuts are allowed to occur,together they would be the majorcontributor to an overall economic

decline of 0.5 percent in 2013 and anunemployment rate that would rise above9 percent by the end of 2013. 4

So far, the debate over the fiscal cliff haslargely focused on its potential impacton the national budget and economy.But the fiscal cliff also would affect thestates. The general economic slowdownthat would result from all of the changesoccurring at once, as projected by CBO,would significantly affect state economicactivity and therefore indirectly affect statebudgets. Increased unemployment, lower

disposable income, and lower spendingmean both lower income and sales taxrevenues and an increase in the numberof individuals who would qualify for statesafety net programs such as Medicaid andunemployment insurance.

Individual components of the fiscalcliff also would have specific impacts

on states budgets. Because states taxcodes are linked in various ways to thefederal tax code, expiring federal taxpolicies could directly affect revenues inmany statesdecreasing tax receipts insome and increasing receipts in others.The scheduled cuts in federal grants to


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thE FiSCal CliFF

states, and cuts to federal spending oncontracts and the federal workforce,would hit some states harder thanothers, depending on the make-up of each states budget and economy. Aspolicy makers consider each of thesecomponents when thinking aboutways to address the fiscal cliff, theimplications for states should be part of the discussion.

This report addresses the potentialstate-specific impacts of the variouscomponents of the fiscal cliff, focusing onhow federal policy changes have a directimpact on state budgets. The analysis

does not, however, examine the potentialinteractions among these changes orprovide an overall assessment of how theentire fiscal cliff would affect states.

For individuals, higher federal and statetaxes reduce disposable personal income,and spending cuts potentially mean lowerlevels of government services. Theseindividual impacts would vary across thestates, depending on how each states taxcode, budget, and economy are structured.If the scheduled tax increases andspending cuts occur as scheduled, stateswould face challenging decisions abouthow to address the individual impacts.

stabilizing the U.s. debt Will help states inthe long rUn

There is widespread agreement on the need to address annual federal budget deficits

and stabilize the debt in the long term CBO has projected that, if the current policycourse proceeds unchanged, the national debt would surpass its World War II peakof 109 percent of GDP by 2026 5 According to CBO, growing debt levels would resultin lower economic growth due to higher interest rates, more borrowing from foreigncountries, and less domestic investment 6 Moreover, higher government interestpayments due to rising debt levels increase the proportion of the federal budget thatcannot be cut, making the task of fixing the deficit far more difficult

States are closely intertwined with the federal government and, in the long term,they certainly would benefit from a healthier federal budget and national economyFederal grants account for roughly one-third of total state revenues, 7 and federal

spending on contracts and the federal workforce accounts for more than 5 percentof total state economic activity 8 Achieving a more stable federal budget outlook,without jeopardizing the long-term fiscal stability of other levels of government,would help create more stable fiscal and economic conditions in the states


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thE FiSCal CliFF

This analysis does not examine the effectson individuals.

There is a great deal of uncertainty aboutwhether any or all of the policies in thefiscal cliff will be addressed temporarilyor permanently. In addition, although theOffice of Management and Budget (OMB),which is responsible for implementingthe automatic spending cuts, has issued

guidance about how the budget cuts wouldaffect each overall budget account, it hasnot yet indicated how the across-the-boardcuts would be applied to each program,

project, and activity within each account,as would have to be done if the sequestergoes into effect. Such detail is critical tounderstanding the impact on individualprograms. As a result, the detailed impactson states are unclear.

aIncludes expirations of the Alternative Minimum Tax patch, the corporate and estate tax provisions, and the individual incometax cuts.bIncludes provisions typically referred to as the tax extenders.c The majority of the decrease in spending on unemployment benets is attributable to the expiration of federally funded benets.

NOTE: Spending gures reect budget outlays.

SOURCE: Congressional Budget Ofce, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022 , August2012 (box 2-1).

TABLE 1:

DEFICIT REDUCTION RESULTING FROM

THE FISCAL CLIFFFISCAL YEAR 2013

Scheduled revenue increasesExpiration of 2001, 2003, and 2009 tax cuts a Expiration of payroll tax cutOther expiring provisions b

Taxes included in the Affordable Care Act

Subtotal, revenue increases

Scheduled spending cutsSequestrationExpiration of federal unemployment insurance bene ts c

Expiration of Medicare doc xSubtotal, spending cuts

Total

$225$85$65$18

$393

$54$34$10 $98

$491

(dollars in billions)


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thE FiSCal CliFF

states have limited capacity to absorbFUrther Fiscal and economic pressUres

Many states are still struggling to emerge from the Great Recession Total state tax

revenues declined from their pre-recession peak by 12 percent, or $97 9 billion in realterms, at the lowest point of the downturn 9 Unemployment rates remain well abovetheir pre-recession peak in most states 10 While aggregate state revenue collectionsare projected to finally recover to pre-2008 levels in 2013, 11 demand for stateprograms and services will continue to put pressure on state budgets

In fact, 19 states projected a combined $30 6 billion in shortfalls when developingtheir fiscal year 2013 budgets, absent further fiscal tightening 12 Unlike the federalgovernment, 49 states have a requirement to balance their budgets, and the 50th,

Vermont, makes it a practice This means states must address the budget shortfalls asthey occur However, state policy makers have mostly exhausted short-term fixes for closing budget gaps such as tapping into rainy day funds, using one-time asset sales,increasing taxes temporarily, postponing construction and other spending, or issuingdebt

States also are being squeezed by funding pressures at the local level On average,states fund close to one-third of local government budgets 13 Lackluster property taxreceipts have strained local revenue, putting pressure on state governments to helpfill the gap 14

Despite the uncertainty, the fiscal cliff provides an opportunity to examine howfederal and state tax codes, revenues,budgets, and spending are linked, and it

provides a framework for assessing howstates could be affected by changes tofederal tax and spending policies. Whether

the fiscal cliff provisions are addressed asa package or individually, federal policymakers can use this framework to morecompletely understand the full costs and

benefits of their policy choices, and therebyavoid shifting fiscal problems from onelevel of government to another.


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t e Sc e e t C es When added together, the fiscal cliff includes about $491 billion in taxincreases and spending cuts in fiscalyear 2013. This is roughly equivalentto the state GDP of New Jersey ($487billion) and nearly the same amount asthe combined state general revenue of thefour most populous statesCalifornia,New York, Texas, and Florida ($508billion).15

As shown in Table 1, $393 billion, orroughly four-fifths, of this amount wouldresult from scheduled tax changes,with spending cuts accounting for theremaining one-fifth, or $98 billion. Thetax changes16 include the:

n expiration of the 2001, 2003, and2009 tax cutswhich included cutsto ordinary income and capital gainstaxes, the corporate income tax, andthe estate taxand the temporarypatch of the Alternative Minimum

Tax (AMT) ($225 billion);n expiration of the payroll tax cut

($85 billion);n expiration of various tax

extenders such as the tax credit forresearch and experimentation and

the enhanced deductions for certainbusiness expenses ($65 billion); and

n implementation of new taxesincluded in the Affordable Care Act($18 billion). 17

State tax systems are linked in variousways to the federal system. This meansthat the expiring tax provisions includedin the fiscal cliff would directly impacttax revenues in nearly all stateswithsome provisions increasing revenue andothers reducing revenue. For example, thescheduled tax changes would have a directimpact on at least:

n 37 states and the District of Columbia that link their personalincome taxesto the expiring federalpersonal income tax provisions; 18

n 23 states that link their corporateincome taxesto certain expiringfederal corporate income taxprovisions; and

n 33 states that link their estate taxes to the expiring federal estate taxprovisions.

This analysis examines the potentialdirect impacts on state tax revenues thatcould occur with the fiscal cliffs changes


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thE SChEdulEd tax ChangES

Oregonallow taxpayers to deducttheir federal income taxes on theirstate tax returns. 20 For these six states,higher federal taxes would mean higherdeductions on state tax returns, whichwould reduce state tax revenues (seeTable 2).

a e s 25 s es ed s c of Co b ko ce fe e e c o swo see c e se e e es.Generally, of the 43 states and the District

of Columbia that levy a personal incometax, most link their tax to the federalrevenue code in some way by adoptingvarious federal definitions of incomeor various federal deductions. 21 Someof these deductions were temporarilyenacted or expanded as part of the 2001,2003, or 2009 tax cuts and have alreadyexpired, are due to expire, or are due

to revert back to their pre-expansionstatus. 22 The scheduled changes include,for example, the reinstatement of limitson some deductions for high-incometaxpayers (estimated to increase 2013federal revenues by $6.1 billion 23) and theelimination of the deduction for highereducation tuition and fees ($0.9 billion). 24

Reducing or eliminating federaldeductions results in more income beingtaxed at the federal level. Depending onhow a states tax code is written, lowerfederal deductions could automaticallyresult in more income being taxed at

the state level as well, which wouldincrease state revenue. For example,the scheduled elimination of the highereducation tuition deduction wouldincrease federal taxable income, andhence federal taxes. For states that adoptthis federal deduction, the impact wouldbe the same: increased taxable incomeand increased state tax revenues. Thisis the case in at least 25 states and theDistrict of Columbia, which wouldautomatically see higher revenues asa result of lower federal deductionamounts (see Table 2). 25 Some of theremaining 18 states with income taxesdo not link to federal deductions, andtherefore would be unaffected by thescheduled federal changes. In otherstates that do link to federal deductions,changes to federal law, including thescheduled changes in the fiscal cliff, maynot be automatically adopted into state

law absent legislative action.

a e s 30 s es ed s c of Co b ko ce fe e c e s wosee c e se e e es.States that link to federal credits thatwould be reduced or eliminated underthe expiring tax provisions would see

increased revenues. Many states havetax credits that are similar to federal taxcredits and, in most cases, actually basetheir credit amount on the federal creditamount. Two such examples includethe Child and Dependent Care Credit


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(CDCC) and the Earned Income TaxCredit (EITC) for low- and moderate-income workers. 26

As of 2011, 30 states and the Districtof Columbia had either a child care taxcredit or deduction or a state-level EITCthat linked to the corresponding federalcredit (see Table 2). 27 Both of these federaltax credits were expanded in recent years(the CDCC in 2001 and the EITC in2001 and again in 2009), but both arescheduled to return to their previous,lower levels when the expansions expireat the end of 2012. The expiration of theCDCC expansion is estimated to increasefederal revenues by $0.3 billion in 2013,while the expiration of EITC expansion isestimated to increase federal revenues by$0.2 billion in fiscal year 2013. 28 If thesecredits were reduced or eliminated, the30 states and the District of Columbia

that link to them would see increasedstate tax revenue.

a e s 23 s es ko ce fe e co o eco e e c o s wo

see c e se e e es.In the same way that state individualincome taxes are linked to the federal

system, some states link their corporateincome taxes to the federal corporatetax. For example, at least 23 stateshave adopted federal rules for certaindeductions related to business expenses(see Table 2). 29 Specifically, these states

adopt the enhanced expensing rules,the federal bonus depreciation rules, orboth. These temporary provisions, whichwere extended several times over the pastdecade, allow businesses to speed upthe normal depreciation schedule underwhich deductions from business incomefor the cost of business property arespread over many years. 30 They are set toexpire at the end of 2012, resulting in anestimated $41.7 billion increase in federalrevenues in 2013. 31 Under this change,the 23 states that link to the federalcorporate rules would see higher taxablecorporate income and hence higher taxrevenues in the near term. 32

t - ee s es ko ce fe e es e o s o s wo see c e see e es.

The federal estate tax is a tax on the value

of a deceased persons estate, includingassets such as cash, real estate, businessinterests, and insurance proceeds. Theestate tax has undergone a number of temporary modifications since the early2000s. As a result of these changes,the current tax rates are lower, theuntaxed portion of the estates value (theexclusion) is higher ($5 million compared

with $1 million), and the federal creditfor estate taxes paid at the state level istemporarily eliminated. These changesare scheduled to expire at the end of 2012, resulting in an increase in federalrevenues in 2013 of around $4 billion. 33


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In 30 states the very existence of thestate estate tax is tied to the existenceof the federal credit, meaning thatwhen the credit was temporarilyeliminated, the estate tax in thosestates was automatically renderedinactive.34 The scheduled return of the federal credit would reactivate theestate tax in these states. An additionalthree states link their estate taxes tothe federal exclusion amount. In these33 states, the scheduled federal estatetax changes would mean higher stateestate taxes as well, thereby increasingstate revenues. 35

So e co o e s of ef sc c ff wo o ec

c s e e e es. At the end of each year, Congress is facedwith addressing an average of at least 50business and personal income tax cuts

that were enacted on a temporary, short-term basis and are therefore expiring oralready expired. These provisions oftenare referred to as the tax extendersbecause, while technically temporary,Congress routinely extends them fora year or more at a time. One groupof extenders, for example, includestax benefits that are geographically

targeted. Private entities in the District of Columbia, for instance, receive specialtax incentives to encourage economicdevelopment. Private entities in Gulf Coast states have access to tax-exempt

financing to reduce the cost of borrowingfor certain activities in the aftermath of Hurricane Katrina.

The fiscal cliff includes dozens of such extenderstheir expiration

would increase federal revenues byan estimated $65 billion in fiscal year2013 (see Table 1). 36 The expirationof tax extenders that are not linkedto state tax codes would not havea direct impact on state revenues.However, the expiration of some of the extenders could affect economicactivity in individual states, potentially

depressing it in states that currentlybenefit and potentially increasing it instates that currently do not benefit fromthe extenders. It is unclear what theeconomic impact would be in each state,or how any potential economic impactcould indirectly affect state revenues. Asnoted earlier, this analysis focuses on thedirect impacts on state revenues of the

scheduled federal tax changes.

The scheduled expiration of the payrolltax cut also would not directly affectstate revenues.

Chan s t th f d al tax c dw uld hav b th di ct and indi ctim acts n stat financ s.


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ne c s f o fe e c es e ce .Changes to the federal tax code wouldhave both direct and indirect impacts on

state finances. For the handful of statesthat allow taxpayers to deduct theirfederal income taxes, the tax increaseswould directly reduce state tax revenues.Conversely, all of the other potentialdirect revenue impacts discussed abovewould, on their own, increase state taxrevenues. The specific effects and netresult of the various direct impacts of the

different tax elements within the fiscalcliff, including any potential interactions

among them, are unclear and wouldvary by state. However, the generaldrag on the overall economy that wouldresult if all of the tax increases were

allowed to take effect37

could indirectlyreduce state revenues so significantly asto overwhelm any of the direct impactsdiscussed here.

Despite the uncertainty, it is important forfederal policy makers to be aware that taxdecisions at the federal level often affectstate revenues, and these impacts should

be considered as part of the decisionmaking process.


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TaBle 2:

Direct impact of the fiscal cliff on statetax revenues

TaxCategories:

PersonalIncome Taxa

CorporateIncome Taxe

EstateTax

Federal changesunder the fiscal cliff:

Increase totalfederal tax

liability

Reduce certainfederal personal

deductionsReduce certainfederal credits

Reduce certainfederal business

deductions

Reduce federalexclusion and

reinstatefederal credit

State linkageto federal policy:

State allowsdeduction for

federal incometaxesb

State linkedto those

deductionsc

State linkedto the EarnedIncome Tax

Creditd

State linked tothe Child and

Dependent CareCreditd


deductionsf

State linkedto thosechanges g

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

District of Columbia

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

indicates an expected increase in state revenue indicates an expected decrease in state revenue(continued)


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TaBle 2:

Direct impact of the fiscal cliff on statetax revenues

TaxCategories:

PersonalIncome Taxa

CorporateIncome Taxe

EstateTax

Federal changesunder the fiscal cliff:

Increase totalfederal tax

liability

Reduce certainfederal personal

deductionsReduce certainfederal credits

Reduce certainfederal business

deductions

Reduce federalexclusion and

reinstatefederal credit

State linkageto federal policy:

State allowsdeduction for

federal incometaxesb


deductionsc

State linkedto the EarnedIncome Tax

Creditd

State linked tothe Child and

Dependent CareCreditd


deductionsf

State linkedto thosechanges g

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virginia

Wisconsin

Wyoming

indicates an expected increase in state revenue indicates an expected decrease in state revenue

(continued)


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TaBle 2: noTes & soURces

a The following states do not levy a personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.b Tax revenue impact in states that allow taxpayers to deduct federal income taxes. Increased federal taxes would lead to higherdeductions on the state tax return, and thus lower tax revenue, in these states.c Tax revenue impact in states that are automatically linked to one or more of the various above-the-line and below-the-linefederal deductions that are scheduled to be reduced or eliminated. Lower deductions would lead to higher state taxable personalincome, and thus higher tax revenue, in these states. Some states without arrows may be impacted by the scheduled changes.Based on Pew analysis of available sources, the potential impact could not be identified at the time of writing. See The Impact of the Fiscal Cliff on the States , endnote 25.d Tax revenue impact in states that are automatically linked to this credit. The scheduled reduction of this credit would lead to higherstate taxable personal income, and thus higher tax revenue, in these states. Two additional states had state EITCs in law but thecredit was suspended (Colorado) or not yet implemented (Washington) as of 2011. States may be affected by linkages to otherfederal tax credits scheduled to change under the fiscal cliff that are not addressed in this analysis.e The following states do not levy a corporate net income tax: Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming.f Tax revenue impact in states that are automatically linked to either: 1) federal bonus depreciation rules, or 2) enhanced expensingrules. The scheduled expiration of these provisions would lead to higher state taxable corporate income, and thus higher taxrevenue, in the near term in these states. Some states without arrows may be impacted by the scheduled changes. Based on Pewanalysis of available sources, the potential impact could not be identified at the time of writing. States may be affected by linkagesto other federal corporate income tax provisions scheduled to change under the fiscal cliff that are not addressed in this analysis.g Tax revenue impact in states that are automatically linked to either: 1) the exclusion amount, or 2) the federal credit for stateestate taxes. The scheduled reduction in the exclusion amount would lead to an increase in the taxable value of estates, and thushigher tax revenue, in the states linked to the exclusion amount. The scheduled return of the credit would lead to the automaticreinstatement of state estate taxes, and thus higher tax revenue, in the states linked to the credit. New Mexicos allowable credit is reduced by the amount of the federal credit claimed. Thus, the scheduled federal reduction of this credit would lead to higher state credit amounts claimed, and thus lower tax revenue, in New Mexico.

SOURCES: Institute on Taxation and Economic Policy, Why States That Offer the Deduction for Federal Income Taxes Paid Get It Wrong , August 2011; Federation of Tax Administrators, State Personal Income Taxes: Federal Starting Points , January 2012,and Range of State Corporate Income Tax Rates , February 2012; Tax Credits for Working Families, States with EITCs ; NationalWomens Law Center, Making Care Less Taxing: Improving State Child and Dependent Care Tax Provisions , April 2011, andFebruary 2012 memorandum, Developments in Federal and State Child and Dependent Care Provisions in 2011 ; CommerceClearinghouse, 2012 State Tax Handbook , Chicago, IL: CCH, 2011; Urban-Brookings Tax Policy Center, Back from the Dead:State Estate Taxes After the Fiscal Cliff , November 2012.


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thE SChEdulEd SpEnding ChangES

The 2011 BCA included two roundsof cuts that would reduce the federalbudget deficit by at least $2.1 trillionover 10 years. 44 The first phase imposedcaps on discretionary spending (such asfunding for low-income school districts orhighways and state grants) for fiscal years2012 through 2021, reducing spendingby roughly $900 billion over 10 yearsrelative to what spending would have beenwithout the caps. 45 As a result, federalspending in the states has already been cutin 2012 relative to spending levels underprior law. 46 The second phase of the BCAwas triggered when Congress was unable

to reach agreement on additional spendingreductions, resulting in required automaticspending cuts of $1.2 trillion over nineyears, scheduled to take effect beginning in

January 2013. 47 This second round of cutsalso would affect states.

For fiscal year 2013, the automaticspending reductions would occurthrough sequestration, 48 resulting inabout $109 billion in cuts split evenlybetween defense and nondefensespending, for reductions of roughly$55 billion in each category (see Table3).49 Given the lag in timing between

*Defense sequestration cuts will come almost entirely from discretionary spending. OMB estimates that $150 million will becut from mandatory defense accounts through 2021.**Percentage cuts not specied.NOTE: Totals may not add due to rounding.SOURCES: Ofce of Management and Budget data; Pew analysis of Congressional Budget Ofce estimates made prior toSeptember 14, 2012, release of OMB report on sequestration.

TABLE 3:

ESTIMATED CUTS RESULTING FROMSEQUESTRATIONFISCAL YEAR 2013

Budget account

Defense

MandatoryDiscretionary

Nondefense

Mandatory Medicare

Other mandatoryDiscretionary

Total

$55

*$55

$55

$17$11

$6$38

$109

**

10.0%9.4%

**

**

2.0%

7.6%8.2%

**

$24

*$24

$30

$9$4

$5$21

$54

(dollars in billions)

Estimated cut(budget authority)

Estimatedpercentage cut

Estimated cut(budget outlays)


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appropriations and expenditures, CBOestimates that the actual impact of sequestration on federal spending in fiscalyear 2013 would be savings of a total of $54 billion (see Table 3). 50

OMB has calculated that the requiredsavings specified under the BCA sequesterfor fiscal year 2013 as compared withfiscal year 2012 51 would amount to a:

n 9.4 percent cut to discretionarydefense spending (for example,funding for overseas operations andweapon systems); 52

n 8.2 percent cut to nondefensediscretionary spending (for example,funding for Head Start and low-income home heating and coolingassistance);

n 7.6 percent cut to nondefensemandatory spending (for example,

funding for the Social Services BlockGrant and the U.S. Forest Service;does not include cuts to exemptprograms such as Medicaid and theSupplemental Nutrition AssistanceProgram, or SNAP);53 and a

n 2 percent cut to Medicare spending(see Table 3). 54

The scheduled cuts in federal grantswould directly affect state budgets, whilethe scheduled cuts in federal spending onprocurement, salaries, and wages wouldaffect state economies and thereby have anindirect effect on state budgets.

State budgets are vulnerableto cuts in federal grants

According to calculations by the FederalFunds Information for States (FFIS),roughly 18 percent of federal grant dollarsflowing to the states would be subject tothe across-the-board cuts in fiscal year2013, including funding for educationprograms, nutrition for low-incomewomen and children, public housing,and other programs. 55 The largest federalgrants, including Medicaid and majorincome support programs, are exemptfrom sequestration.

Based on OMB estimates of the across-the-board percentage cuts that would beapplied to all nonexempt, nondefensemandatory and discretionary programs,FFIS estimates that sequestrationwould result in cuts totaling about $7.5billion, or roughly 7 percent of federalnonexempt, nondefense grants to statescompared with fiscal year 2012 fundinglevels.56 Because these cuts would nottake effect until January 2013, threemonths into the federal fiscal year, theimpact of the cuts could be greater thanthey would be if they were spread overa full 12 months. Moreover, the actualfinal cuts to state grants could be evenlarger than estimated because, as statebudget experts note, experience hasshown that relatively small cuts at theagency level often translate into largercuts to the funding available withinthose agencies for state grants. 57 For


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example, the House-passed fiscal year2012 U.S. Department of HomelandSecurity spending bill proposed anoverall spending reduction for theagency of 2.6 percent, but reducedfunding for the Federal EmergencyManagement Agencys state and localprograms by 57 percent. 58

Because states differ in the type andamount of federal grants they receive,their exposure to general across-the-board cuts differs significantly. In all,total federal grants subject to sequestermade up more than 10 percent of South

Dakotas revenue, compared with lessthan 5 percent of Delawares revenue in2010, the most recent year for whichcomplete data are available (see Figure 1and Table 4). 59 Because federal fundingfor specific program areas accountsfor varying shares of each states totalrevenue, cuts in a given program couldaffect some states more than others. Forexample, in 2010, almost 5 percent of South Dakotas total state revenue camefrom federal education programs subjectto the sequester, while these programsaccounted for less than 2 percent of Delawares state revenue that year. 60

NOTE: Grants calculations exclude funds that would be sequestered in FY 2013 but would be disbursed October 1, 2013,at the start of FY 2014. FY 2010 is the most recent year for which state revenue data are available. See endnote 59 for moreinformation.

SOURCE: Pew analysis of Federal Funds Information for States and Census Bureau State Government Finances data.

FIGURE 1:

FEDERAL GRANTS SUBJECT TO SEQUESTER AS A PERCENTAGE OF STATE REVENUE

FISCAL YEAR 2010

Delaware

AlaskaMinnesota

Wyoming

Connecticut

National Average

Tennessee

Texas

Georgia

Illinois

South Dakota 10.3%

8.5

8.5

8.0

7.7

6.6

5.2

5.2

5.04.9

4.8

h i g h e s t

l o w e s t


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State economies are

vulnerable to cuts in federalspending on procurement,salaries, and wagesCuts in federal procurement and salariesand wages could slow economic activity,and thereby adversely affect state financesby reducing state personal income andsales tax revenues and increasing demand

for state-funded income support programs. Again, the effects on states would vary,based on the level of such federal spendingin the state. Total federal spendingon procurement, salaries, and wagesaccounted for almost 20 percent of the

combined state GDP of Maryland, Virginia,and the District of Columbia, comparedwith just over 1 percent of Delaware GDP(see Figure 2 and Table 4). 61

Defense cuts. Defense is the largestarea of total federal spending onprocurement, salaries, and wages 62 and,in 2010, it accounted for more than 3.5percent of the total GDP of the states. 63 There is wide variation across thestates in the contribution of this federaldefense spending to state economies.For instance, in 2010, federal defensespending on procurement, salaries, andwages made up almost 15 percent of

*Maryland, Virginia, and the District of Columbia are combined due to the high percentage of commuters in the area.NOTE: Figures do not include U.S. Postal Service, as only a small share of its spending is supported by the federal budget.SOURCE: Pew analysis of Census Bureau Consolidated Federal Funds Report and Bureau of Economic Analysis data.

FIGURE 2:

TOTAL FEDERAL SPENDING ON PROCUREMENT,SALARIES, AND WAGES AS A PERCENTAGE OFSTATE GDPFISCAL YEAR 2010

Delaware

Minnesota

New York

Oregon

Michigan

National Average

Kentucky

New Mexico

Alaska

Hawaii

Maryland, Virginia,and DC* 19.7%

15.8

13.3

12.8

9.9

5.3

2.4

2.1

2.0

1.8

1.3

h i g h e s t

l o w e s t


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Hawaii GDP (see Figure 3 and Table4). 64 By contrast, this spending was only1 percent of the state GDPs of Oregon,Delaware, and Minnesota. 65 In general,states in which such spending accountsfor a relatively high share of economicactivity would be the most vulnerable tothe scheduled defense cuts.

Nondefense cuts. In 2010, federalnondefense spending on procurement,salaries, and wages accounted for 1.8percent of the total GDP of the states. Aswith federal defense spending on theseitems, there is significant variation in

the contribution of this type of federalnondefense spending to state economicactivity. In 2010, federal nondefensespending on procurement, salaries, andwages accounted for about 10 percentof the combined state GDP of Maryland,

Virginia, and the District of Columbia,compared to 0.3 percent of Delaware GDP(see Figure 4 and Table 4). 66

Nondefense workforce. States withthe greatest share of federal nondefenseworkers would be vulnerable to potentialcuts in federal salaries and wages. Forexample, Maryland, Virginia, and the

*Maryland, Virginia, and the District of Columbia are combined due to the high percentage of commuters in the area.

SOURCE: Pew analysis of Census Bureau Consolidated Federal Funds Report (CFFR) and Bureau of Economic Analysisdata.The CFFR defense spending categories are based on major agency codes, while the BCA sequester applies to the budgetfunction code for defense. While there are differences, this chart uses CFFR data for purposes of showing the comparativeimportance of defense spending overall to state economies. FY 2010 is the most recent year for which CFFR and state GDPdata are available.

FIGURE 3:

FEDERAL DEFENSE SPENDING ONPROCUREMENT, SALARIES, AND WAGES

AS A PERCENTAGE OF STATE GDPFISCAL YEAR 2010

Oregon

Delaware

Minnesota

New York

Wyoming

National Average

Alabama

Kentucky

Maryland, Virginia , and DC *

Alaska

Hawaii 14.6%

10.5

9.8

8.0

7.0

3.5

1.4

1.3

1.0

1.0

0.9

h i g h e s t

l o w e s t


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District of Columbia together account formore than 20 percent of the total federalnondefense workforce. Together, themore than 293,000 federal nondefenseemployees in these jurisdictions representmore than 4 percent of the areas workers(see Figure 5). 67 Yet even for some stateswith relatively low numbers of federalnondefense workers, such as Alaska, thefederal nondefense workforce constitutes adisproportionately large share of the statestotal nondefense workforce. 68 For example,

Alaska has about 7,500 federal nondefenseemployees, but these employees represent2.3 percent of the states total nondefenseworkforce (see Figure 5 and Table 4). 69

Expiration of Federal

Unemployment InsuranceBenefits could have a directimpact on state budgetsThe scheduled expiration of federallyfunded unemployment insurancebenefits at the end of 2012 is estimatedto reduce the deficit by $34 billion infiscal year 2013. 70

Unemployment Compensation(UC) The standard mechanism forproviding unemployment compensationis the federal-state UC program, whichprovides unemployment insurance for a

*Maryland, Virginia, and the District of Columbia are combined due to the high percentage of commuters in the area.NOTE: Figures do not include U.S. Postal Service, as only a small share of its spending is supported by the federal budget.SOURCE: Pew analysis of Census Bureau Consolidated Federal Funds Report and Bureau of Economic Analysis data.

FIGURE 4:

FEDERAL NONDEFENSE SPENDING ONPROCUREMENT, SALARIES, AND WAGES

AS A PERCENTAGE OF STATE GDPFISCAL YEAR 2010

Delaware

Connecticut

New Jersey

Indiana

Rhode Island

National Average

Tennessee

West Virginia

Idaho

New Mexico

Maryland, Virginia , and DC * 10.0%

9.2

4.9

3.8

3.1

1.8

0.7

0.7

0.6

0.5

0.3

h i g h e s t

l o w e s t


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maximum of 26 weeks in most states. 71 State UI taxes levied on employers payfor most of these benefits.

Extended Benefits (EB) Individualsin states meeting certain unemploymentrate triggers may qualify for up to 20additional weeks of benefits under the EBprogram. 72 Under permanent law, statespay for half of this program with UI taxes,and the federal government covers theother half using revenue from Federal

Unemployment Taxes.73

The Middle ClassTax Relief and Job Creation Act of 2012(enacted in February 2012) required thefederal government to continue to pay100 percent of the EB program throughthe end of 2012 (with a phase-out). 74

Emergency UnemploymentCompensation (EUC) EUC is atemporary federal program created

in 2008 to provide up to 53 weeks of unemployment benefits. The Middle ClassTax Relief and Job Creation Act of 2012extended the temporary federal EUCprogram to January 2013. 75

Availability of EB and EUC benefits hasbeen phasing out during 2012. By thebeginning of 2013, EUC is scheduled to

expire completely, and EB is scheduledto revert back to its permanent status of being funded equally by the federal andstate governments. 76 Currently, of the50 states and the District of Columbia,only New York meets the EB triggers. 77

*Maryland, Virginia, and the District of Columbia are combined due to the high percentage of commuters in the area.

SOURCE: Pew analysis of Bureau of Labor Statistics and Ofce of Personnel Management data.

FIGURE 5:

FEDERAL NONDEFENSE WORKFORCE AS A PERCENTAGE OF TOTAL EMPLOYED IN STATE

FISCAL YEAR 2012

Connecticut

New Jersey

Delaware

Indiana

Wisconsin

National Average

West Virginia

Montana

Alaska

New Mexico

Maryland, Virginia, and DC* 4.2%

2.4

2.3

2.1

1.9

1.0

0.5

0.5

0.4

0.4

0.4

h i g h e s t

l o w e s t


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It is unclear whether New York wouldcontinue to meet the triggers in 2013. 78 Generally, the loss of the additional federalunemployment funding would not resultin a significant immediate direct budgetimpact on states.

Expiration of Medicare docfix would not have a directimpact on state budgetsThe scheduled cuts in Medicare physicianpayment rates are estimated to reduce

the deficit by $10 billion in fiscal year2013. 79 In January 2013, Medicarephysician payment rates are scheduledto go down by 27 percent when thecurrent doc fix expires. 80 This is aresult of a series of so-called doc fixesimplemented since 2003, in whichCongress overrode statutorily requiredautomatic cuts in Medicare physician

payment rates. In addition, as of February2013, provider rates are scheduled to becut by an additional 2 percent as partof sequestration of mandatory spendingspecified in the BCA.81

Medicare is a federal health insuranceprogram for individuals 65 years andolder, and most permanently disabledindividuals under age 65. Becauseit is funded entirely by the federalgovernment, state budgets would notexperience any direct impact from thescheduled rate cuts.

ConclusionDecisions regarding whether to extendtax policies or repeal scheduled spendingcuts are particularly challenging giventhe current federal deficit and fragileeconomic recovery. Understanding howthese decisions also may impact statesadds an extra degree of complexity to analready difficult task. These implicationsare nonetheless real and should beconsidered as federal policy makersevaluate all the costs and benefits of these choices. The public interest is bestserved by an enriched policy debate thatrecognizes implications for all levels of government and leads to long-term fiscalstability for the nation as a whole.

Th ublic int st is b st s v d by ann ich d licy d bat that c niz sim licati ns f all l v ls f v nm ntand l ads t l n -t m fiscal stability fth nati n as a wh l .


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**Grants calculations exclude funds that would be sequestered in FY 2013 but would be disbursed October 1, 2013, at the start of FY 2014.*The data for Maryland, Virginia, and the District of Columbia, are combined due to the high percentage of commuters in the area.

SOURCES: Pew analysis of Federal Funds Information for States, Census Bureau State and Local Government Finance Survey, Bureau of Labor Statistics,Ofce of Personnel Management, Census Bureau Consolidated Federal Funds Report, and Bureau of Economic Analysis data.

AL AK

AZ

AR

CA

CO

CT

DE

DC

FL

GA

HI

ID

IL

INIA

KS

KY

LA

ME

MD

MA

MI

MN

MS

MO

MT

NE

NVNH

NJ

NM

NY

NC

ND

OH

OK

OR

PA

RI

SC

SD

TN

TX

UT

VT

VA

WA

WV

WI

WY

6.6%

7.5

4.9

7.7

6.2

6.1

7.3

5.2

4.8

5.9

7.2

8.5

5.4

7.2

8.5

6.45.3

6.0

6.8

6.6

6.7

5.4

5.5

6.7

5.0

7.6

7.2

7.5

7.0

6.76.8

5.8

6.1

6.6

6.3

6.6

6.7

6.3

6.6

6.8

7.0

6.9

10.3

7.7

8.0

6.9

6.0

5.6

6.1

6.7

5.5

5.2

5.3%

8.9

13.3

6.7

3.4

4.0

7.0

5.8

1.3

19.7 *3.6

6.9

15.8

6.4

2.5

3.12.4

6.3

9.9

4.7

4.8

19.7 *4.9

2.4

1.8

5.4

7.6

4.8

2.8

3.03.1

2.7

12.8

2.0

4.5

4.4

2.8

5.5

2.1

4.4

3.4

7.4

4.4

4.9

5.4

5.3

5.7

19.7 *5.9

5.2

4.6

3.2

3.5%

7.0

10.5

5.2

2.4

2.8

4.4

5.3

1.0

9.8 *2.5

5.2

14.6

1.4

1.5

2.51.7

5.1

8.0

3.8

3.7

9.8 *3.7

1.5

1.0

3.8

5.9

2.1

2.0

1.82.2

2.1

3.6

1.3

3.7

2.6

1.9

4.3

0.9

2.7

2.8

4.8

2.7

1.8

4.1

3.7

4.1

9.8 *4.0

1.5

3.9

1.4

1.0%

0.8

2.3

1.3

0.9

0.8

1.2

0.4

0.4

4.2 *0.8

1.1

1.1

1.2

0.6

0.50.5

0.7

0.9

0.7

0.7

4.2 *0.7

0.5

0.6

0.9

1.2

2.1

0.7

0.90.6

0.4

2.4

0.6

0.6

1.2

0.5

1.0

1.1

0.7

0.6

0.6

1.8

0.8

0.9

1.3

1.3

4.2 *1.0

1.9

0.5

1.6

1.8%

1.9

2.8

1.4

1.0

1.2

2.6

0.5

0.3

10.0 *1.1

1.7

1.2

4.9

1.0

0.70.7

1.2

1.9

1.0

1.1

10.0 *1.2

0.9

0.8

1.6

1.7

2.7

0.9

1.20.9

0.6

9.2

0.7

0.8

1.8

0.8

1.2

1.1

1.7

0.7

2.6

1.7

3.1

1.3

1.6

1.7

10.0 *2.0

3.8

0.7

1.8

NATIONAL AVERAGE

TABLE 4:

SELECTED INDICATORS OF STATES POTENTIAL VULNERABILITIESTO SPENDING CUTS IN THE FISCAL CLIFF

Federal GrantsSubject to Sequester as a Percentage ofState Revenue(2010)**

Federal Spending onProcurement, Salaries,and Wages as aPercentage of StateGDP (2010)

Defense Spending onProcurement, Salaries,and Wages as aPercentage of StateGDP (2010)

Nondefense Spendingon Procurement,Salaries, and Wages as a Percentage ofState GDP (2010)

Federal NondefenseWorkforce as aPercentage of TotalEmployed in State(2012)


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E o es1 Bruce D. McDowell, Advisory Commission onIntergovernmental Relations in 1996: The End of an Era, Publius(Spring 1997): pp. 111127. The

Advisory Commission on Intergovernmental Relationsand units in the Office of Management and Budget, theGovernment Accountability Office, and the Office of Personnel Management were disbanded in the 1980sand 1990s. The House and Senate intergovernmentalrelations subcommittees have been given othersubstantial responsibilities. The Census Bureau recentlydecided to discontinue two significant sources of uniform data for federal-state fiscal information. Thetwo reports, the Consolidated Federal Funds Report and the Federal Aid to Statesreport, are no longerbeing published, although their historical data can beaccessed online.

2 Congressional Budget Office, An Update to the Budgetand Economic Outlook: Fiscal Years 2012 to 2022(August2012), http://cbo.gov/sites/default/files/cbofiles/ attachments/43539-08-22-2012-Update_One-Col.pdf.

3 Ibid, Box 2-1.

4 The Congressional Budget Office estimates thatunder current law the unemployment rate will rise to9.1 percent in the fourth quarter of 2013, averaging8.8 percent for the calendar year; CongressionalBudget Office, An Update to the Budget and Economic

Outlook: Fiscal Years 2012 to 2022, August 2012. CBOsestimates are based on the total fiscal restraint thatis scheduled to occur in 2013. Without economicfeedback effects incorporated, more than four-fifthsof the estimated fiscal restraint is attributable to taxand spending provisions specific to the fiscal cliff,with less than one-fifth due to other provisions in tax

law and spending rules that would increase revenuesand lower federal spending outside of the fiscal cliff;Congressional Budget Office, Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013 (May 2012), http://www.cbo.gov/sites/default/ files/cbofiles/attachments/05-22-FiscalRestraint_ScreenFriendly.pdf.

5 Congressional Budget Office, The 2012 Long-TermBudget Outlook(June 2012), http://cbo.gov/sites/default/ files/cbofiles/attachments/LTBO_One-Col_2_1.pdf.These projections are based upon CBOs alternativefiscal scenario, which assumes that many of theprovisions in the fiscal cliff will not occur as scheduled.

6 Congressional Budget Office, The 2012 Long-TermBudget Outlook, June 2012.

7 From 2000 to 2010, federal grants accounted for anaverage 30 percent of total state revenues. In 2010, themost recent year for which data are available, federalgrants accounted for about 35 percent of total staterevenues, reflecting the influx of federal stimulus fundsand the concurrent decline in state tax revenues. U.S.Census Bureau, 2010 Annual Survey of State GovernmentFinances(December 2011), http://www.census.gov/ govs/state/.

8 Pew analysis of data from the U.S. Census BureauConsolidated Federal Funds Report for Fiscal Year

2010 (September 2011), http://www.census.gov/ prod/2011pubs/cffr-10.pdf; and state gross domesticproduct data from the U.S. Bureau of Economic

Analysis, Regional Economic Accounts(2012), http://bea.gov/regional/index.htm. Does not include U.S. PostalService (USPS) as only a small share of USPS spendingis supported by the federal budget.


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EndnOtES

9 Pew analysis of U.S. Census Bureau, AnnualSurvey of State Government Tax Collections(2008 and2010), http://www.census.gov/govs/statetax/. In statefiscal year 2010, total tax revenues for all 50 stategovernments had declined to $701.6 billion, downfrom their previous peak in state fiscal year 2008 whenstate tax revenues totaled $799.5 billion. Note thatthe state tax revenue estimates are in real, inflation-adjusted terms.

10 Pew analysis of U.S. Bureau of Labor Statistics,Local Area Unemployment Statistics (2007), accessedOctober 19, 2012, http://www.bls.gov/lau/lastrk07.htm; and U.S. Bureau of Labor Statistics, Local AreaUnemployment Statistics (September 2012), accessedOctober 19, 2012, http://www.bls.gov/web/laus/ laumstrk.htm.

11 National Governors Association and National Association of State Budget Officers, The Fiscal Surveyof States(Spring 2012), pp. vii-x, http://www.nasbo.org/sites/default/files/Spring%202012%20Fiscal%20Survey_1.pdf. Estimates included in these reportsshowing that revenues are expected to recover to pre-recession levels are not adjusted for inflation.

12 National Governors Association and National Association of State Budget Officers, The Fiscal Survey

of States, Spring 2012, p. vii.13 Pew analysis of U. S. Census Bureau, 2010 AnnualSurvey of State and Local Government Finances(2010),http://www.census.gov/govs/estimate/.

14 Pew Center on the States, The Local Squeeze: FallingRevenues and Growing Demand for Services ChallengeCities, Counties, and School Districts(June 2012), http:// www.pewstates.org/uploadedFiles/PCS_Assets/2012/ Pew_Local_Squeeze(1).pdf.

15 Pew Analysis of U.S. Census Bureau, 2010 AnnualSurvey of State Government Finances, December 2011.

16 For a list of changes to the estate tax andindividual income tax provisions scheduledto occur, see Roberton Williams, Eric Toder,Donald Marron, and Hang Nguyen, Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much? (Urban-Brookings Tax Policy Center, October

1, 2012), http://www.taxpolicycenter.org/ UploadedPDF/412666-toppling-off-the-fiscal-cliff.pdf. The estate tax provisions included in the 2001tax cut were due to expire at the end of 2010 andwere replaced with new provisions enacted in2010. Although the AMT patch and various otherprovisions have already expired, these changes areincluded in the fiscal cliff because most taxpayerswould not pay the resulting increase in 2012 taxliabilities until they file their taxes in 2013. Thescheduled expiration of the individual income taxrate cuts at the end of 2012 would have a moreimmediate impact, as the higher rates would bereflected in the 2013 withholding schedules.

17 Congressional Budget Office, An Update to theBudget and Economic Outlook: Fiscal Years 2012 to 2022,

August 2012.

18 This is the number of states that either (1) allowtaxpayers to deduct federal taxes paid, or (2) wouldbe affected by scheduled changes to at least one of the following: various deductions, the Child andDependent Care Credit, the Earned Income Tax Credit,corporate income tax deduction rules, or the estate tax.See Table 2.

19 Williams et al., Toppling Off the Fiscal Cliff , 2012.

20 Institute on Taxation and Economic Policy, WhyStates That Offer the Deduction for Federal Income TaxesPaid Get It Wrong(August 2011), http://www.itep.org/ pdf/pb51fedinc.pdf.

21 For example, 29 states begin their tax calculationsby having taxpayers copy over adjusted gross incomefrom their federal tax form, while eight states startwith federal taxable income; Federation of Tax

Administrators, State Personal Income Taxes: FederalStarting Points,January 2012. Because these federalstarting points already incorporate various federaldeductions, those deductions are implicitly adoptedby these states as well. While states sometimes makemodifications to disallow or adjust some of the federaldeductions on their state tax returns, many of thedeductions still impact states. Even in the few statesthat do not use a federal starting point, various federaldeductions often are selectively adopted.


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EndnOtES

22 Certain provisions that expired at the end of 2011are considered part of the fiscal cliff because most of the initial revenue impact from their expiration wouldoccur in 2013, when most taxpayers file their 2012income taxes.

23 U.S. Department of the Treasury, GeneralExplanations of the Administrations Fiscal Year 2013Revenue Proposals(February 2012), Table 2, http:// www.treasury.gov/resource-center/tax-policy/ Documents/General-Explanations-FY2013.pdf. Thisincludes the scheduled return of two tax provisions:the limit on the value of itemized deductions forcertain high-income taxpayers, often referred to as thePease limitation; and the personal exemption phase-out, or PEP, which reduces and ultimately eliminatesthe personal exemption for high-income taxpayers.

24 Congressional Budget Office, Effects of ExtendingTax Provisions Scheduled to Expire Before 2022,supplemental table to An Update to the Budget andEconomic Outlook: Fiscal Years 2012 to 2022(August2012), http://www.cbo.gov/publication/43547; andU.S. Department of the Treasury, General Explanationsof the Administrations Fiscal Year 2013 RevenueProposals, February 2012, Table 2. The deduction forhigher education tuition and fees expired at the endof 2011. Tax provisions that expired at the end of

2011 affect tax calculations for tax year 2012. Theseprovisions are considered part of the fiscal cliff becausemost of the initial revenue impact from their expirationwould occur in 2013, when most taxpayers file their2012 income taxes.

25 Lower federal deduction amounts would resultfrom changes to both above-the-line and below-the-line deductions. Calculations are based on informationfrom the Federation of Tax Administrators, StatePersonal Income Taxes: Federal Starting Points, January

2012, and Pew Center on the States interviews withKaren Jacobs, senior economist, Arizona Department of Revenue, September 18, 2012; Paul Wilson, director,Tax Research Division, Minnesota Department of Revenue, September 18, 2012; Laura Wheeler, seniorresearch associate, Georgia State University FiscalResearch Center, September 28, 2012; Roger Cox,

director, Research and Development Division, West Virginia State Tax Department, October 1, 2012; Jon Hart, senior economist, Oregon Department of Revenue, October 2, 2012; Susan Mesner, senioreconomist, Vermont Department of Taxes, October3, 2012; Jim Landers, senior fiscal analyst, IndianaLegislative Services Agency, October 5, 2012; andMichael Allen, director of economic research, MaineRevenue Services, October 8, 2012.

26 The EITC is designed to reward the work of lower-income workers by offsetting federal payroll taxesand, in cases where the credit exceeds tax liability,providing cash assistance. Internal Revenue Service,EITCIts Easier Than Ever to Find Out if You Qualify

for EITC , accessed October 9, 2012, http://www.irs.

gov/Individuals/EITC-Home-Page--Its-easier-than-ever-to-find-out-if-you-qualify-for-EITC. The CDCC helpsfamilies pay for child or dependent care needed for aparent or spouse to work or look for work. InternalRevenue Service, Ten Things to Know About the Child andDependent Care Credit(March 7, 2011), http://www.irs.gov/uac/Ten-Things-to-Know-About-the-Child-and-Dependent-Care-Credit.

27 Twenty-three states and the District of Columbiahave child care tax credits or deductions that are linked

to the federal CDCC. Nancy Duff Campbell, Amy K.Matsui, Julie G. Vogtman, and Anne W. King, MakingCare Less Taxing: Improving State Child and DependentCare Tax Provisions(National Womens Law Center,

April 2011), Appendix A, http://www.nwlc.org/sites/ default/files/pdfs/nwlc-mclt2011-without_report_card_inside_and_bookmarked.pdf. Twenty-three states andthe District of Columbia have a state-level EITC tied tothe federal EITC. Two additional states had state EITCsin law but they were suspended (Colorado) or not yetimplemented (Washington) as of 2011. Tax Credits for

Working Families, States with EITCs, accessed October1, 2012, http://www.taxcreditsforworkingfamilies.org/ earned-income-tax-credit/states-with-eitcs/.

28 U.S. Department of the Treasury, GeneralExplanations of the Administrations Fiscal Year 2013Revenue Proposals, February 2012, Table 2.


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EndnOtES

29 These states include Alabama, Colorado,Connecticut, Delaware, Illinois, Kansas, Louisiana,Massachusetts, Michigan, Minnesota, Mississippi,Missouri, Montana, Nebraska, New Mexico, New

York, North Dakota, Oklahoma, South Carolina,Utah, Vermont, Virginia, and West Virginia.Commerce Clearinghouse, 2012 State Tax Handbook(2011).

30 The enhanced expensing rules under section179 of the Internal Revenue Code allow businessesto deduct, or expense, part or all of the cost of newand used qualified property in the first year, up to$125,000. Bonus depreciation allows 50 percent of the cost of qualified property to be deducted in thefirst year. Commerce Clearinghouse, 2012 State TaxHandbook, 2011, pp. 424-432. For a full legislativehistory see Gary Guenther, Section 179 and BonusDepreciation Expensing Allowances: Current Law,Legislative Proposals in the 112th Congress, and EconomicEffects(Congressional Research Service, August 2,2012), http://www.nationalaglawcenter.org/assets/crs/ RL31852.pdf.

31 Congressional Budget Office, Effects of ExtendingTax Provisions Scheduled to Expire Before 2022,supplemental table to An Update to the Budget andEconomic Outlook: Fiscal Years 2012 to 2022, August2012.

32 The short-term revenue increase would be partiallyoffset by future revenue losses. The corporate incomerules that are set to expire have allowed businessesto front-load deductions for business expenses overa shorter period of time, making the deductionmore valuable in the near term and less valuable inthe long term. The expiration of these rules wouldrequire businesses to spread the deduction over alonger period, essentially limiting the deduction

amount in any single year. For a description of therevenue-shifting impact of these provisions see theUrban-Brookings Tax Policy Center Quick Facts:Bonus Depreciation and 100 Percent Expensing, accessedOctober 8, 2012, http://www.taxpolicycenter.org/ taxtopics/Bonus-Depreciation-and-100-Percent-Expensing.cfm#5.

33 Together, the expiring federal estate and gifttaxes are estimated to increase federal revenues bya combined $4.6 billion in 2013 (and $28.0 billionin 2014). Congressional Budget Office, Effects of Extending Tax Provisions Scheduled to Expire Before2022, supplemental table to A n Update to the Budgetand Economic Outlook: Fiscal Years 2012 to 2022, August2012. This combined estimate does not break outrevenues from the federal gift tax, but these generallyaccount for a small amount of total federal estate andgift tax revenues, for example, roughly 11 percent in2008. See Congressional Budget Office, Federal Estateand Gift Taxes(December 2009), http://www.cbo.gov/ sites/default/files/cbofiles/ftpdocs/108xx/doc10841/12-18-estate_gifttax_brief.pdf.

34 Five states permanently eliminated their estatetaxes, while 15 states and the District of Columbiaeither do not reference the federal estate tax credit atall or refer to the federal credit as it stood before the2001 estate tax changes, rendering their estate taxeffectively independent of future changes in the federalcredit. Norton Francis, Back From the Dead: State EstateTaxes After the Fiscal Cliff (Urban-Brookings Tax PolicyCenter, November 14, 2012).

35 The federal credit allows states to levy an estate tax,up to a certain level, without increasing the combined

federal and state tax burden on an estate. As a result,in the 30 states that are linked to the federal credit,the increase in state revenues would come fromforegone revenues at the federal level, rather than fromadditional taxes imposed on an estate. Leonard Burmanand Sonya Hoo, State-Level Estate and Inheritance Taxes (Urban-Brookings Tax Policy Center, August 28,2006), http://www.taxpolicycenter.org/publications/url.cfm?ID=1001019.

36 Congressional Budget Office, An Update to the

Budget and Economic Outlook: Fiscal Years 2012 to 2022, August 2012, Box 2-1.


August 2012.

38 Ibid.


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39 From 2000 to 2010, federal grants accountedfor an average 30 percent of total state revenues.In 2010, the most recent year for which data areavailable, federal grants accounted for about 35percent of total state revenues, reflecting the influxof federal stimulus funds and the concurrentdecline in state tax revenues. Grants is a broadterm that also includes payments-in-lieu-of-taxesand reimbursements, among other provisions.U.S. Census Bureau, 2010 Annual Survey of StateGovernment Finances, December 2011.

40 Federal Funds Information for States, What if theBCA Sequester Is Implemented Next January? (July 20,2012), http://www.ffis.org/node/2860.

41 Chris Whatley, Sequestration and the States(Council

on State Governments, Knowledge Center , November22, 2011), http://knowledgecenter.csg.org/drupal/ content/sequestration-and-states.

42 Pew analysis of data from the U.S. CensusConsolidated Federal Funds Report for Fiscal Year 2010 and state gross domestic product data for 2010from the U.S. Bureau of Economic Analysis, RegionalEconomic Accounts, 2012. Does not include U.S. PostalService, as only a small share of USPS spending issupported by the federal budget.

43 Virtually all domestic federal spending, includingpayments and aid sent directly to individuals, such asSocial Security benefits and cash and non-cash incomesupport, affects economic conditions in the states. TheBCA exempts such direct payments to individuals fromthe automatic cuts.

44 Relative to the Congressional Budget Offices March2011 current law baseline. Congressional BudgetOffice, Estimated Impact of Automatic Budget EnforcementProcedures Specified in the Budget Control Act(September

12, 2011), http://www.cbo.gov/sites/default/files/ cbofiles/attachments/09-12-BudgetControlAct.pdf.

45 Congressional Budget Office, Estimated Impact of Automatic Budget Enforcement Procedures Specified in theBudget Control Act, September 12, 2011.

46 Federal Funds Information for States, What if the BCASequester Is Implemented Next January? July 20, 2012.

47 Congressional Budget Office, Estimated Impact of Automatic Budget Enforcement Procedures Specified inthe Budget Control Act, September 12, 2011. Cuts to

Medicare are scheduled to go into effect in February2013. Congressional Budget Office, An Update to theBudget and Economic Outlook: Fiscal Years 2012 to 2022,

August 2012.

48 In general, sequestration applies the samepercentage spending cut to every program, projectand activity within a given budget account, but it isunclear how much flexibility agencies would have inimplementing the cuts. See, for example, Karen Spar,Budget Sequestration and Selected Program Exemptions

and Special Rules(Congressional Research Service, August 9, 2012), http://www.fas.org/sgp/crs/misc/ R42050.pdf.

49 Congressional Budget Office, Estimated Impact of Automatic Budget Enforcement Procedures Specified in theBudget Control Act, September 12, 2011.


August 2012.

51 Office of Management and Budget, OMB ReportPursuant to the Sequestration Transparency Act of 2012 (September 14, 2012), http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/ stareport.pdf.

52 Technically, cuts under the sequester apply tobudgetary resources. Defense cuts under sequestrationwould come almost entirely from discretionaryaccounts. OMB has calculated that mandatory defensespending, which would be reduced by 10 percent,

would be cut by $0.1 billion. In a July 31, 2012, letterto Vice President Biden, OMB issued notice of thepresidents intent to exempt all military uniformedpersonnel accounts, which are discretionary, fromsequestration (http://www.whitehouse.gov/sites/default/ files/omb/legislative/letters/military-personnel-letter-biden.pdf).


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53 Other nonexempt mandatory programs includestudent loans, vocational rehabilitation, and othersmaller programs. The BCA exempts many mandatoryprograms from sequestration, including Medicaid, theChildrens Health Insurance Program (CHIP), veteransbenefits, Temporary Assistance for Needy Families(TANF), SNAP, and other income support programs.Office of Management and Budget, OMB ReportPursuant to the Sequestration Transparency Act of 2012,September 14, 2012.

54 Under the BCA, cuts to Medicare and certain otherprograms are limited to 2 percent of the current lawbaseline.

55 Federal Funds Information for States, What if theBCA Sequester Is Implemented Next January? July 20,

2012. This figure is based on grants included in theFFIS database, which includes almost all federal grantsto states.

56 Federal Funds Information for States database,updated October 10, 2012, http://www.ffis.org/ database.

57 Chris Whatley, Sequestration and the States,November 22, 2011.

58 National Association of State Budget Officers, Impact

on States of Federal Deficit Reduction, October 5, 2011.

59 Pew analysis of Federal Funds Informationfor States database and U.S. Census, 2010 AnnualSurvey of State Government Finances, December 2011.Calculations exclude funds for certain programs thatwould be subject to sequester but for which fiscalyear 2013 funds would be disbursed October 1,2013, at the start of fiscal year 2014. These includefunds from the following programs: Abandoned MineLand Reclamation, U.S. Bureau of Land Management

Payments in Lieu of Taxes, Boating Safety Financial Assistance, Coastal Impact Assistance, Crime Victim Assistance, Crime Victim Compensation, Sport FishRestoration, Wildlife Restoration and Basic HunterEducation, U.S. Forest Service Schools and RoadsGrants to States, and the Mineral Leasing Act program.

60 Pew analysis of Federal Funds Information forStates database and U.S. Census, 2010 Annual Survey of State Government Finances, December 2011.

61 Pew analysis of U.S. Census Bureau, ConsolidatedFederal Funds Report for Fiscal Year 2010, September

2011, and state gross domestic product data fromthe U.S. Bureau of Economic Analysis, RegionalEconomic Accounts, 2012. The CFFR procurementdata are allocated by place of performance.Maryland, Virginia, and the District of Columbiadata are combined due to the high percentage of commuters in the area.

62 Pew analysis of U.S. Census Bureau, ConsolidatedFederal Funds Report for Fiscal Year 2010, September2011. The Office of Management and Budget on July

31, 2012, issued notice of the presidents intent toexempt all military uniformed personnel accounts,which are discretionary, from sequestration.

63 Pew analysis of U.S. Census Bureau, ConsolidatedFederal Funds Report for Fiscal Year 2010, September2011, and state gross domestic product data fromthe U.S. Bureau of Economic Analysis, RegionalEconomic Accounts, 2012. The CFFR defense spendingcategories are based on major agency codes while theBCA sequester applies to the budget function code

for defense (050). While there are differences, thisanalysis uses CFFR data for purposes of showing thecomparative importance of defense spending overallto state economies. Fiscal year 2010 data are used as itis the most recent year for which CFFR and state GDPdata are available.

64 Ibid.

65 Ibid.

66 Pew analysis of U.S. Census Bureau, Consolidated

Federal Funds Report for Fiscal Year 2010, September2011, and state gross domestic product data from theU.S. Bureau of Economic Analysis, Regional Economic

Accounts, 2012. Maryland, Virginia, and the Districtof Columbia data are combined due to the highpercentage of commuters in the area.


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67 Pew analysis of U.S. Bureau of Labor Statistics,Regional and State Employment and Unemployment(May2012), http://www.bls.gov/news.release/archives/ laus_06152012.htm; and data from U.S. Office of Personnel Management, FedScope (March 2012), http:// www.fedscope.opm.gov/employment.asp.

68 Ibid.

69 Ibid.

70 Congressional Budget Office, An Update to the Budgetand Economic Outlook: Fiscal Years 2012 to 2022, August2012. On net, spending on unemployment benefitswill be $34 billion less in fiscal year 2013 comparedwith fiscal year 2012, and the majority of the changeis attributable to the expiration of federally fundedbenefits.

71 U.S. Department of Labor, State UnemploymentInsurance Benefits, updated January 13, 2010, http:// workforcesecurity.doleta.gov/unemploy/uifactsheet.asp.

72 Ibid.

73 Julie M. Whittaker and Katelin P. Isaacs,Unemployment Insurance: Legislative Issues in the 112th Congress(Congressional Research Service, September12, 2012), http://www.fas.org/sgp/crs/misc/R41662.pdf.

74 Ibid.

75 Ibid.

76 Ibid.

77 As of October 7, 2012. U.S. Department of Labor,Employment and Training Administration, Trigger Notice No. 2012-38, State Extended Benefit (EB) IndicatorsUnder P.L. 112-96, accessed October 22, 2012, http://

ows.doleta.gov/unemploy/trigger/2012/trig_100712.html.

78 At the time of writing, New York was on the EBprogram through the week ending December 9, 2012.

Whether it continues to stay on EB past that datedepends on future unemployment data.

79 Congressional Budget Office, An Update to the Budgetand Economic Outlook: Fiscal Years 2012 to 2022, August2012.

80 Centers for Medicare and Medicaid Services,Estimated Sustainable Growth Rate and Conversion Factor,

for Medicare Payments to Physicians in 2012(March2012), http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/SustainableGRatesConFact/Downloads/ sgr2012p.pdf.

81 The 2 percent cut specified under the BCA appliesto Medicare payments to Medicare Advantage plans,Part D (prescription drug) plans, and hospitals andphysicians, while the doc fix related cut applies only

to physicians.


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