Fiscal Cliff Deal Poses Uncertainty for States

Project Update

Fiscal Cliff Deal Poses Uncertainty for States

On January 2, 2013, the American Taxpayer Relief Act (ATRA) was signed into law. This legislation addressed many, but not all, of the provisions that have been discussed as part of the fiscal cliff, including both expiring tax provisions and scheduled spending cuts. For example, the majority of the income tax cuts originally passed in 2001 and 2003 were made permanent while the scheduled spending cuts under the sequester were reduced and delayed until March 1, 2013.

The Impact of the Fiscal Cliff on the States described potential direct impacts on state budgets resulting from scheduled tax increases and also included selected indicators showing each state’s vulnerabilities to scheduled federal spending cuts. Though the enactment of the ATRA did extend some of the expiring tax provisions and therefore negated some of the revenue impacts discussed in the report, not all of the provisions were extended and as a result some of the state revenue impacts discussed in the report would still occur (absent state action). On the spending side, although the sequester was delayed for two months and the cuts were reduced by $24 billion, the indicators of states’ exposure to the sequester and possible future federal spending cuts discussed in the report remain as relevant as ever.

State Revenue Impacts of the Tax Provisions in the ATRA

  • The six states that allow a deduction for federal income taxes would see reduced revenues as a result of higher income tax rates for certain taxpayers.
  • States that link to certain personal income deductions would see higher revenues as a result of the reinstatement of the personal exemption phase-out and the limit on itemized deductions for higher-income taxpayers.
  • At least 23 states that link to certain federal corporate income tax deductions would see lower revenues as a result of the law’s more generous “enhanced expensing” rules.

The law’s extension of the Earned Income Tax Credit, the Child and Dependent Care Credit, and the federal estate tax means states would not experience any of the potential revenue impacts discussed in the report related to these provisions.

State Potential Vulnerabilities to Spending Cuts (Sequester)

ATRA postponed the largest spending component of the fiscal cliff—the automatic budget cuts under the sequester—until March 1. Though the law decreased the scheduled reductions from $109 billion to $85 billion, states continue to face a great deal of uncertainty about how the cuts could be implemented and the exact impacts on state budgets and economic activity. The report’s indicators of each state’s potential vulnerabilities to these and any future federal budget cuts continue to provide a useful gauge of how federal deficit reduction could affect states.

The law extended both federally financed unemployment insurance benefits and the Medicare “doc fix” through the end of 201