Without a Cliff Deal, States Will Bleed Red Ink

by Eric Pianin and Brianna Ehley The Fiscal Times (excerpt)

...For the 43 states (including Hawaii) and the District of Columbia that levy a personal income tax, most of them would see an increase in revenues in the coming year if Obama and Congress allow the tax cuts and other deductions to expire. That’s because those states link their tax systems to the federal revenue code by adopting various federal definitions of income or various federal deductions and credits.

If the tax cuts are allowed to expire, that would mean – for example – the reinstatement of limits on some deductions for high-income taxpayers (estimated to increase 2013 federal revenues by $6.1 billion) and the elimination of the deduction for higher education tuition and fees (nearly $1 billion).Depending on how a state’s tax code is written, lower federal deductions could automatically result in more income being taxed at the state level as well, which would increase state revenue.

Moreover, at least 23 states (including Hawaii) have adopted federal rules for certain deductions related to business expenses. The scheduled expiration of those provisions would mean higher taxable corporate income and hence higher state tax revenues. And scores of states would see their revenues rise with the elimination of other federal tax breaks and credits.

The bad news is that the more than $100 billion of automatic across-the-board cuts in defense and domestic spending set to take effect beginning in January (the dreaded sequester) would deliver a serious blow to many states that have grown accustomed to substantial federal aid and procurement. This is particularly true in states such as Maryland, Virginia, New Mexico, Kentucky and Hawaii that are home to substantial defense industry facilities and military installations and that benefit from much higher than average national spending.

Federal spending on defense accounts for more than 3.5 percent of the total gross domestic product of the states, but there is wide variation across the states. Officials at Lockheed-Martin and other major defense contractors have warned of as many as one million layoffs in the defense industry if the country goes over the fiscal cliff.

Read … Cliff Deal?

PEW: Impact of Fiscal Cliff on the States