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Saturday, November 17, 2012

The Fiscal Cliff and the States

A report by the Pew Center on the States on 11/15/12 notes that the fiscal cliff the federal government is facing also affects the states. They note that with state tax systems usually tied closely to the federal tax rules, expiration of federal tax cuts will also result in higher state taxes for taxpayers and greater collections for the states. But it will also result in a larger contraction of the economy than we are hearing about when only the federal picture is considered. Pew also notes though that six states allow for a deduction of federal taxes and they would see a reduction in state taxes because of the impending higher amount of federal taxes many people will have in 2013.

Sequestration at the federal level may reduce certain grants and other funds that states receive.

Also see "Without a Cliff Deal, States Will Bleed Red Ink, by Pianin and Ehley in The Fiscal Times, 11/16/12.

I encourage you to review the Pew report to learn what the possible impact of the federal fiscal cliff is for your state. The federal-state fiscal cliff connection is also a reminder that there is a connection between federal and state tax rules and systems that is relevant for tax reform.

For example, in discussing base broadening at the federal level to allow for continued lower rates, a few of the items will have direct and indirect impacts on state budgets. For example, if some portion of tax-exempt interest income becomes taxable, state and local governments will most likely find they need to offer higher interest rates.  Also, cut back of the low-income housing credit or new markets credit will have indirect unfavorable effects on state and local governments who are indirect beneficiaries of these federal rules.

Ideally we'll see Congress reach out to the state and vice versa as tax reform activities ramp up in the 113th Congress.

What do you think?   

1 comment:

Anders Wenstrand said...

I think it is pretty clear we need to increase the revenue to the federal government to beging to solve the deficit (though I don't think our problem is deficit driven, but we have a problem of un-even growth in the population which depressess spending).

Let the taxes on high incomes expire (it will have no effect on jobs or behavior). Moderately increase taxes on middle incomes (that would include myself). Use that government revenue to reduce the growth of the deficit, but apply the majority of it to projects that will kick start manufacturing growth and act as a counter balance to the depressed state-level spending.

Then, once growth has returned fully, reform the tax code so everyone pays into it (even the poor, if only symbolically by 1 dollar). This gives everyone a stake and makes everyone part of the system.

We need to return to evidence based governing. Right now, austerity is running a huge experiment in Europe and it isn't working at all. We absolutely do not need austerity. We need spending. We should also, in an enviromentally friendly way, open up for more gas drilling in the U.S. as cheap energy is the foundation of a great manufacturing sector.