Living on the Edge: States Brace for Fiscal Cliff
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State government leaders say that the fiscal cliff has serious potential spillover effects on state and local governments, and they are taking steps now to cushion the blow.
One troublesome scenario being discussed in Washington is the elimination of taxpayers’ ability to deduct state and local taxes from their federal tax returns, leaving many state residents – particularly in high tax states like New York — paying much of the bill for services not covered by the federal government, according to Richard Ravitch, former Lieutenant Governor of New York and co-chair of the State Budget Crisis Task Force. “Nobody is taking the states into account in these discussions,” he said. Ravitch, along with representatives from three other state governments, participated in “A Balancing Act: Tough Decisions in the Face of the Fiscal Crisis,” a December 11 event hosted by the National Chamber Foundation.
If the fiscal cliff is not avoided on January 1, states stand to lose $7.5 billion in federal funding in 2013 for 161 grant programs subject to automatic spending cuts, according to the Federal Funds Information for States. In addition, more than 1 million jobs could be lost due to automatic spending cuts of $33.6 billion for defense contracting and military spending, including 8,000 aerospace and defense jobs in Oklahoma, said Denise Northrup, chief of staff to Oklahoma Gov. Mary Fallin.
In Virginia, Gov. Bob McDonnell has found ways to cut spending and reorganize government to bring his state’s $6 billion budget shortfall under control and create a $448.5 million budget surplus for fiscal year 2012, according to McDonnell chief of staff Martin Kent. Gov. McDonnell is using part of that surplus to create a $30 million Federal Action Contingency Trust Fund, a reserve to help Virginia mitigate the consequences of potential sequestration and other negative federal actions that could adversely affect the state’s economy and future revenue collections. “We’re waiting to see where the chips fall but preparing as best we can,” Kent said.