The Associated Press
As Congress and the White House negotiate over ways to avoid a “fiscal cliff” at the start of the new year, governors and state lawmakers are watching anxiously because of the potential effect on state budgets. Here are five things to know about the political stalemate:
The term “fiscal cliff” refers to the potentially negative economic effects that could come about from a pair of events timed to occur with the new year. Tax cuts enacted during the tenure of President George W. Bush are to expire at the end of 2012. And across-the-board cuts are to begin in January to defense spending and other federal programs. Officials in Washington are trying to agree on an alternative plan for reducing the deficit.
States could lose an estimated $7.5 billion in federal funding if the automatic spending cuts take effect for 161 grant programs. Some of the biggest cuts could come in aid to schools that teach large numbers of low-income students, special education, early childhood programs and food subsidies for women and children.
State economies could take a hit if an automatic $33.6 billion in spending cuts go forward for the military and defense contractors. States with heavy defense spending include Virginia, California and Texas.
Because of how state tax codes are linked to federal taxes, more than half the states could see an increase in state income tax collections if cuts are made to federal income tax deductions and credits. But that potential boost in revenue could be wiped out if the “fiscal cliff” leads to another recession, as some predict.
The uncertainty in Washington comes as many governors are preparing budgets to present to state legislatures early in 2013. If no resolution is reached by January, states may have to delay some of their own budget decisions or make assumptions that will have to be revised later. .