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What Will 'Fiscal Cliff' Mean for Alabama?comment (0)

December 20, 2012

By Jim Williams

Unless Congress and the president agree this month on an alternative solution, in January the United States government will tumble over a “fiscal cliff” that includes automatic tax increases and spending reductions. Not only would Alabama taxpayers be affected, but also the state’s economy and the finances of the state government, cities, counties and local school systems. 

There is broad agreement on the need to reform the finances of the federal government. Federal debt is equal to three-fourths of the nation’s economic output and will exceed it within two decades. Annual deficits have exceeded $1 trillion in each of the past four years. However, the adjustments in the fiscal cliff are steep, and the Congressional Budget Office projects that they would shrink the national economy and raise unemployment in 2013.

According to the Tax Foundation, falling off the “cliff” would cause federal taxes to rise by 5.3 percent for a typical Alabama family in 2013. Alabama allows taxpayers to deduct federal taxes on their state income tax returns, which would offset some of the increase. At the same time it would significantly reduce state income tax revenue, which is earmarked for education.

The spending cuts in the fiscal cliff are across-the-board reductions that are much like proration in Alabama. Federal grants are a major funding source for our state’s budget. According to the Pew Center for the States, cuts of about 8 percent would hit federal agencies that distribute grants for schools, highways and other services, except for Medicaid and other large income support programs that would be exempt. The grant programs themselves might see bigger cuts.  

In addition to cutting federal grants, the fiscal cliff would bring a 9 percent cut in national defense spending, a 27 percent cut in physician reimbursements under Medicare and the end of certain unemployment benefits. These would not directly affect the state budget, but they would hurt Alabama economically. For example, federal spending on salaries, wages and operating costs represents about 9 percent of the Alabama economy; it is concentrated in the defense sector that is hardest hit by the spending reductions.

These kinds of impacts make clear why both sides in the debate claim to be seeking solutions other than falling off the fiscal cliff. But they also tell us that the national government’s fiscal problems are serious and won’t be resolved without taking painful steps in coming years. 

EDITOR’S NOTE — Jim Williams is executive director for the nonprofit, nonpartisan Public Affairs Research Council of Alabama. Jim may be contacted at jwwillia@samford.edu.

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