‘Cliff’ Deal Answers a Few Questions for States

Congress averted the much-feared “fiscal cliff” late Tuesday (January 1), passing a legislative package that will be signed by President Obama.  The deal answered a few burning questions for state governments, but many still linger.

Governors in recent weeks had been pressing Washington to find a way to stave off the combination of tax increases and spending cuts that took effect on New Year’s Day. Going over the self-made cliff, as Stateline has reported would have hugely impacted states.

By delaying but not addressing the automatic $1.2 trillion in across-the-board spending cuts the cliff entailed, Congress left states with little clue about how much their share of federal revenue will shrink this year.

Federal education funding would be cut by more than $1 billion under spending cuts still scheduled for later this year, and cuts to federal grant programs for food and health care for women, infants and children would leave states filling the gap in services for their most vulnerable populations. Military states, notably California, Texas and Virginia, would be hit particularly hard from a 10 percent cut in defense spending.  

Wind state governors, however, will likely praise the one-year extension of the Wind Production Tax Credit, whose sunset was stirring angst within the wind energy industry and in states that have invested heavily in wind power.

The Governors Wind Energy Coalition, a bipartisan group of 23 state executives, had recently turned up the volume on calls for extension of the credit, which will cost several billion dollars.

Congress also renewed $30 billion in unemployment insurance that had expired at year’s end and will help ease pressure on state aid programs.

Those extended benefits, based upon a state’s unemployment rate, allow unemployed Americans to receive help past the usual 26 weeks. The program frees states from having to rely on already-decimated trust funds to help the unemployed.

What’s more, Last September, 18 states and the Virgin Islands paid about $2 billion in interest to the federal government to cover debts from huge loans that plugged trust fund shortfalls at the height of the Great Recession, as Stateline has reported.  Current law would have required states to repay that debt or raise taxes to make up the rest of the difference, a possibility experts worried would dampen economic growth.

The Congressional Budget Office has said extending the current unemployment benefits for another year would boost the economy and create 300,000 jobs next year alone.