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Cuts, 'cliff' cloud state plans

November 25, 2012 12:10 am





As Gov. Bob McDonnell prepares his amendments to Virginia's budget in the coming weeks, he will do so in the face of a big unknown: how Congress might act on two budget and tax issues that could affect Virginia's economy.

Congress would have to act by January to avert sequestration cuts and the "fiscal cliff."

Sequestration is the $1.2 trillion package of budget cuts put in place during the debt ceiling deal last year. Lawmakers who approved the cuts didn't want them to actually take place; they were meant to push Congress into negotiating a different, less harsh package of cuts, but such negotiations have so far gone nowhere.

Half of those cuts would come from defense, and studies indicate that could cost up to 200,000 jobs in Virginia; the Northern Virginia and Hampton Roads economies are particularly dependent on defense and federal contracting work.

A failure to stop the sequestration cuts is expected to hurt Virginia's economy.

The "fiscal cliff" is the term for a group of tax cuts set to expire in January if Congress doesn't act to extend them. Those cuts include the Bush-era tax cuts on income, a 2-percent payroll tax cut and other tax cuts in the 2009 stimulus package, the estate tax, and some corporate taxes.

McDonnell and the state's legislative money committees are looking at how both issues would affect the Virginia budget. McDonnell said recently that, at a minimum, leaders will be cautious with their revenue forecasts and spending predictions. He has asked state agencies to prepare plans for budget cuts in case they're necessary.

According to a report on the fiscal cliff from the Pew Center on the States, letting tax cuts expire would result in higher taxes for most individuals. But it would provide more revenue to at least half of the states, including Virginia, because those states have linked their tax codes to the federal tax code. If taxpayers are paying more in federal taxes, they'll also be paying more in state taxes.

The Pew Center also said, though, that allowing all of the cuts to expire would likely cause a general economic slowdown that would "overwhelm" any separate impacts.

According to reports from the House Appropriations and Senate Finance committees, defense cuts are the biggest threat to Virginia's economy, because of the state's dependence on federal procurement and contracting jobs. Losses there would lead to losses in tax revenue--both sales and income taxes--for the state.

The House report said that procurement spending in Virginia totaled $59.5 billion, and $42.8 billion of that was in defense procurement. Virginia is the top state recipient of federal procurement spending per capita.

Defense cuts, the report said, are estimated to be 71 percent of the federal cuts seen by Virginia in fiscal year 2013.

Virginia is less dependent on federal grants, and would also be less affected by cuts in other areas of federal spending.

A 5 percent cut in federal procurement and salary spending would reduce federal spending in Virginia by $850 per person, the House report said. A similar cut to federal grants would be just $67 per person.

"As a result, the potential revenue reductions from sequestration far exceed the direct state spending impacts," said the House report.

Virginia actually receives less direct federal spending for grants to state and local governments than some other states, although federal grants still totaled $9.9 billion to Virginia in 2012, about 24 percent of the state's operating budget, said the House report.

In Northern Virginia, direct federal spending accounts for 36 percent of the economy, the House report said. It cited an Old Dominion University estimate that 45 percent of the gross state product in the Hampton Roads region comes from direct or indirect defense spending.

The House and Senate reports said that many areas of federal spending would be exempt from sequestration cuts--including transportation and health care programs like Medicaid.

That means the sequestration cuts would come "disproportionately" from other programs, the House report said, while states would still see overall increases in federal grant funding in fiscal year 2013 because of increases in high-growth programs like Medicaid.

The House said many of the other federal programs that would bear the brunt of sequestration cuts are not mandatory for states, but that political considerations might result in lawmakers choosing to cover the lost funding to continue those programs.

The Senate report predicted that Virginia can expect decreases in federal spending in the future, no matter what happens with the sequestration and fiscal cliff issues.

It also pointed out that the state has attempted to prepare for federal spending cuts by setting aside money--$30 million--for a Federal Action Contingency Fund, started by McDonnell in recent years.

Chelyen Davis: 540/368-5028

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