WASHINGTON — Alabama’s tax policies and reliance on defense spending make the state especially vulnerable if Congress fails to avoid the “fiscal cliff” of tax increases and spending cuts set to take effect next year.
Almost everyone in the country will take a financial hit if lawmakers fail to agree on a debt-reduction plan in the next 30 days.
Paychecks will shrink and tax burdens will increase. Schools, military bases, hospitals — pretty much any service that relies on federal funding — will feel the impact. And economists warn that the country would slip back into a recession.
In some respects, Alabama would experience greater pain than other states.
It’s one of only six states that allow residents to deduct their federal income taxes on their state tax returns. If federal taxes go up, so do state-tax deductions, putting an even bigger dent in the state’s budget.
In addition, 7 percent of the state’s gross domestic product comes from federal defense spending on contracts and salaries — twice the national average, according to the Pew Center on the States.
Federal officials, mostly at the Pentagon, spent $10.4 billion on procurement contracts in the state in 2010 alone.
Without a deal on avoiding the fiscal cliff, defense spending will be cut by $500 billion over 10 years, an amount that President Barack Obama and most members of Congress agree would damage national security.
Such cuts would certainly take a heavy toll on procurement contracts — and the jobs linked to them — in Alabama.
“We don’t know exactly how Alabama will be affected, but we will be affected,” said Rep. Martha Roby, R-Montgomery.
The spending cuts associated with the fiscal cliff were created in August 2011 as part of legislation to raise the nation’s debt limit. They were designed to give Congress a strong incentive to negotiate a less-painful strategy for reducing the federal deficit. So far, that strategy hasn’t worked.
Roby said there are ways to cut defense spending that make sense, but she described the across-the-board cuts linked to the fiscal cliff as arbitrary.
“That’s why I voted against this plan and warned that threatening these kinds of drastic military cuts was the wrong way to deal with a difficult budget situation,” Roby said.
The possibility that Congress won’t act in time to avoid the automatic spending cuts and tax increases already is having a chilling effect on the state.
“Some contracts are not being let, so contractors have been slow to hire,” said Joe Ritch, a Huntsville attorney who monitors the area’s defense and aerospace industry. “Just the anticipation has led to some being extremely cautious.”
Ritch is among those who believe Congress will avert the crisis in the next 30 days, or at least dampen its impact.
“Maybe that’s a head-in-the-sand approach, but I do not believe we’re going to have our country go to that level of such a Draconian approach,” Ritch said.
School systems in Alabama hope Ritch is right. Because of the state tax deduction for federal income taxes, Alabama already forgoes $485 million a year that otherwise would help pay for public education, according to the Alabama Legislative Fiscal Office.
“If federal income taxes are increased, it would have a negative effect on our state income tax,” said Norris Green, executive director of the office. “We do not yet have an estimate but will be following the decisions made in Washington so that we can gauge the impact of any increases enacted.”
Failing to avoid the fiscal cliff would mean that tax cuts enacted in 2001 and 2003 will expire, which would affect households at all income levels.
Someone earning between $20,000 and $40,000 would pay an average of $558 more if the cuts expire. And if the alternative minimum tax isn’t adjusted for inflation, the higher tax would land on many more middle- and upper-income families.
“If Congress does nothing, every family in America will see their income taxes automatically go up on January 1st,” Obama said Friday in Pennsylvania. “That’s sort of like the lump of coal you get for Christmas.”
Half the spending cuts that are part of the fiscal cliff would affect non-defense programs, including about 30 health, education and labor programs.
Next year, those cuts would cost Alabama $9.8 million and 330 jobs in Head Start programs around the state, according to an analysis by the Democratic staff of the Senate Appropriations Committee.
That would mean 1,584 fewer spaces for children. In addition, the state’s block grant for child care and development would be cut by $3.3 million, eliminating child care subsidies for 1,253 families.
An $18 million cut to Title I grants would eliminate 248 education jobs, and special education grants would drop by $14 million.
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