States Most and Least Vulnerable to the Fiscal Cliff

Laura Joszt

The effect of the fiscal cliff won't just hit individuals, it will affect states as well since almost all states have tax codes linked to the federal code.

The effect of the fiscal cliff won’t just hit individuals, it will affect states as well since almost all states have tax codes linked to the federal code.

“Changes to the federal tax code would have both direct and indirect impacts on state finances,” according to the Pew Center on the States.

If the U.S. goes over the fiscal cliff on Jan. 1, some states might have to make the decision to increase state revenues because of expiring tax provisions. Lower federal deductions would mean more income taxed at the state level for at least 25 states. Plus, changes in the estate tax could mean that 33 states would collect more revenue.

However, the changes don’t necessarily mean more revenue for states. Six states — Alabama, Iowa, Louisiana, Missouri, Montana and Oregon — allow taxpayers to deduct their federal income taxes on their state tax returns, which means a higher state tax deduction and a reduction in state tax revenues.

Scheduled revenue increases include the expiration of 2001, 2003 and 2009 tax cuts resulting in $225 billion; expiration of the payroll tax cut resulting in $85 billion; taxes included in the Affordable Care Act resulting in $18 billion and other expiring provisions totaling $65 billion. Plus, spending cuts totaling $98 billion.

All told, the deficit would be reduced by $491 billion — roughly equivalent to New Jersey’s GDP — in fiscal year 2013. But at what price? Most seem to agree that all of those tax increases and spending cuts at once would push the country into another recession.

(Note: Maryland, Virginia and Washington D.C. have been combined due to the high amount of commuters. Spending cuts are as a percent of state GDP in 2010.)

Most Vulnerable to Spending Cuts (% of 2010 State GDP)

5. Kentucky

Defense spending: 8%

Nondefense spending: 1.9%

Total: 9.9%

4. New Mexico

Defense spending: 9.2%

Nondefense spending: 3.6%

Total: 12.8%

3. Arkansas

Defense spending: 2.8%

Nondefense spending: 10.5%

Total: 13.3%

2. Hawaii

Defense spending: 1.2%

Nondefense spending: 14.6%

Total: 15.8%

1. D.C./Maryland/Virginia

Defense spending: 9.8%

Nondefense spending: 10%

Total: 19.8%

Least Vulnerable to Spending Cuts (% of 2010 State GDP)

5. (tie) Iowa

Defense spending: 1.7%

Nondefense spending: 0.7%

Total: 2.4%

5. (tie) Michigan

Defense spending: 1.5%

Nondefense spending: 0.9%

Total: 2.4%

4. Oregon

Defense spending: 0.9%

Nondefense spending: 1.1%

Total: 2.1%

3. New York

Defense spending: 1.3%

Nondefense spending: 0.7%

Total: 2%

2. Minnesota

Defense spending: 1%

Nondefense spending: 0.8%

Total: 1.8%

1. Delaware

Defense spending: 1%

Nondefense spending: 0.3%

Total: 1.3%