While Waiting for the Tipping Point: The Impact of the Fiscal Cliff on the States

The “fiscal cliff,” a series of expiring federal tax provisions and scheduled spending cuts set to take effect in January 2013, will directly affect state budgets according to a new report, The Impact of the Fiscal Cliff on the States, released by The Pew Center on the States. The study finds that the effects on the states from the fiscal cliff’s different tax and spending provisions vary greatly based on the degree states are tied to the federal tax code and federal spending.

“To understand the full cost and benefits of proposals to address the fiscal cliff, policy makers need to know how federal and state policies are linked,” said Pew project director Anne Stauffer. “The implications for states should be part of the discussion so that problems are not simply shifted from one level of government to another.”

Federal policy makers will very soon be faced with difficult decisions about whether and how to address several expiring tax policies and scheduled spending cuts. This report looks at the categories of policies that make up the fiscal cliff and addresses each of their potential impacts on the states.

Scheduled tax changes account for roughly four-fifths — or $393 billion — of the total amount of the fiscal cliff. Because state tax systems are linked in various ways to the federal tax code, the changes would directly affect tax revenue in nearly all states. If certain federal taxes increase, state revenues in most instances would automatically increase as well:

• For at least 25 states and the District of Columbia, lower federal deductions would mean more income being taxed at the state level as well, resulting in higher state tax revenues.
• At least 30 states and the District of Columbia would see revenue increases because of tax credits based on federal tax credits that would be reduced.
• At least 23 states have adopted federal rules for certain deductions related to business expenses. The scheduled expiration of these provisions would give these states higher taxable corporate income and hence higher tax revenues in the near term.
• Thirty-three states would collect more revenue as a result of changes in the estate tax that would take effect at the beginning of 2013.

Illustration: Detail from Government. Mural by Elihu Vedder, 1896. Lobby to Main Reading Room, Library of Congress Thomas Jefferson Building, Washington, D.C. Main figure is seated atop a pedestal saying “Government” and holding a tablet saying “A Government/of the People / By the People/ For the People”. Wikimedia Commons