If the president and Congress do not reach an agreement on tax and spending issues by Dec. 31 and the nation goes over the so-called fiscal cliff, the Pew Center on the States warns in a new report that the complex fiscal ties between federal and state governments could result in broad implications.
For New Jersey residents, it would mean poorer state residents could owe more in state taxes because of a reduction in the Earned Income Tax Credit, the center warned. State residents could also see unspecified personal and corporate tax deductions vanish.
These and other consequences are outlined in a new report released by the Pew Center on Thursday. The report, “The Impact of the Fiscal Cliff on the States,” explained that federal and state finances are closely intertwined, and the fiscal cliff’s taxing and spending provisions will have far-reaching consequences for the states that are now only partially known.
The fiscal cliff is a combination of automatic spending cuts and tax increases that include the 2011 agreement that ended the debt-ceiling debate. The federal income, dividend, estate and capital gains tax rates would increase Jan. 1, while the estate tax would apply to smaller estates. At the same time, federal defense and domestic spending would see $100 billion in cuts, the first part of 10-year, $1 trillion cuts.
The Congressional Budget Office has said that the fiscal cliff would lead to a recession and increase unemployment to 9.1 percent by the end of 2013.
The Tax Policy Center last month estimated taxpayers in the middle 20 percent of income — those earning between about $39,790 and $64,484 — would see an additional $1,984 in taxes as a result of the fiscal cliff. All would see some increase, the center said, from an additional $412 from the bottom 20 percent — those who earn up to $20,113 per year — to $633,946 from the top 0.01 percent who earn in excess of $2.7 million.
In a brief presentation Thursday, Pew project director Anne Stauffer said the uncertainty comes from myriad links between federal and state spending, and that it is not entirely clear what the impact will be.
“The interesting thing is that the federal change will affect all the states,” she said in a conference call, “but the variability depends on the budget structure and economy.” She said policy-makers need to know how the federal and state policies are linked, and this should be discussed so the problems are not shifted from one government level to another.
Federal spending would also decrease with the fiscal cliff, potentially diminishing the local economy. New Jersey may fare better than most, because the state budget is less dependent on federal dollars, according to the report.
About 5.8 percent of state revenue is based on federal grants subject to sequestration, the automatic budget cuts that were part of the Budget Control Act of 2011. States average 6.6 percent of their budgets from these grants.
Similarly, 2.7 percent of New Jersey’s gross domestic product comes from federal purchases and wages, compared to the 5.3 percent national average. Most of that is in defense spending: 2.1 percent of New Jersey’s GDP comes from federal defense spending, compared to the 3.5 percent national average.
Typically, about 1 percent of a state’s workforce is comprised of federal workers not involved in defense. That figure is 0.4 percent in New Jersey. County-level and more local figures were not available.
Contact Derek Harper:
Follow Derek Harper on Twitter @dnharper