Heartland States on High Alert Over Fiscal Cliff
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The Fiscal Times
November 26, 2012

In a recent call with reporters, Democratic Sen. Tom Harkin of Iowa signaled he was willing to let the country topple over the fiscal cliff unless President Obama and Congress strike a deal to force wealthy Americans to pay more in taxes and that protects Medicare and Medicaid from deep cuts.

“No deal is better than a bad deal, because things will change after Jan. 1, the positions will change,” Harkin explained. “Quite frankly, if we don’t get a good deal, we’ll just take it up in January or February."

But other Iowa officials have a less cavalier view of what would happen if Obama and congressional leaders fall short of negotiating an agreement to block the more than $600 billion of tax increases and spending cuts that are set to take effect beginning Jan. 2.

Iowa Gov. Terry Branstad told The Iowa Gazette that the potential impact to the Hawkeye State could be “grave.” The Republican governor noted that a sudden increase in the federal estate tax would hurt farmers and small businesses and that cuts in defense spending could lead to a loss of jobs at the Rockwell Collins aerospace and defense company in Cedar Rapids. In September, Rockwell Collins announced as many as 1,000 employees may have to be laid off, including 350 directly related to the potential federal spending cut and others due to declining defense spending.

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Just as Washington policymakers and politicians are obsessing on the damage that the fiscal cliff poses to the national economy and jobs picture, state and local officials in the U.S. heartland are steeling themselves for the possibility of a major loss of tax revenue, federal aid and grants next year.

While practically every state is certain to experience some economic turmoil if the country tumbles over the fiscal cliff, Iowa is one of only six states that could suffer a double whammy of declining state revenues and a significant loss of federal aid. The Iowa Department of Revenue estimates that state income tax revenue could decline as much as $90 million during the first six months of 2013, and $200 million to $300 million during fiscal 2014 because of a quirk in the state’s tax code.

State programs, morever, would likely receive $52.9 million less than expected in the current year because of the automatic reductions in federal spending mandated under last year’s debt ceiling legislation, according to a recent study by the Iowa Legislative Services Agency.

State officials and analysts hasten to say that the revenue losses would be far from cataclysmic in a state that raises more than $4 billion annually in individual and corporate income tax revenue. Moreover, the reductions in federal aid would represent a relatively small percentage of the total annual amount.

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Amid fears that the lethargic economy might slip back into a recession next year, the specter of declining state revenues and federal aid will greatly complicate the task of many state legislatures and governors in balancing their budgets while meeting essential needs, according to experts.

“It’s not going to wipe us out, but $200 million or more [of lost revenue next year] is a lot in the legislature when they’re trying to fund programs,”  Amy Harris, the Department of Revenue’s manager of tax research and program analysis, told The Fiscal Times. “So certainly one should pay attention, and we certainly need to consider that when budgets are being set.”

Many state officials had been counting on another good year of revenue growth and improving economic conditions after years of budget shortfalls throughout the Great Recession. But with parts of the East Coast devastated by Hurricane Sandy and the possibility of a year-end federal fiscal calamity, governors and state officials across the country are on high alert.

Washington Editor and D.C. Bureau Chief Eric Pianin is a veteran journalist who has covered the federal government, congressional budget and tax issues, and national politics. He spent over 25 years at The Washington Post.