By Gayle S. Putrich | Colorado Watchdog
DENVER — What’s bad for individual taxpayers could be good for Colorado’s state coffers — but that doesn’t mean anyone is looking forward to falling off the “fiscal cliff” come next year.
Colorado state revenue could actually increase when federal tax cuts expire Jan. 1, which will happen in 29 other states where state tax rates are tied to federal rates, according to a state-by-state fiscal cliff impact study by the Pew Research Center.
State and federal tax rates are closely but quietly linked, Pew researchers say. The lower federal deductions coming next year would actually mean more income available to be taxed by the state, resulting in higher state revenues. Colorado would likely also take in more money when federal tax credits on personal income are reduced, the study says.
But while more money would be coming in under the 2013 changes, Colorado is also more likely than most states to take a hit on federal jobs, grants and other spending under sequestration, the component of the fiscal cliff that means $1.2 trillion in federal spending cuts over the next decade. The Centennial State ranks above the national average when it comes to federal jobs and grant spending on state projects.
Federal grants subject to possible sequestration make up 7.3 percent of Colorado’s state revenue, compared with 6.6 for most states, according to Pew.
Federal spending on defense in Colorado accounts for more than 4.4 percent of the total gross domestic product for the state, compared to the national average 3.5 percent. Non-defense federal jobs in Colorado pull in 2.6 percent of state GDP, which means 7 percent of Colorado’s state GDP is dependent on federal spending that could be cut under sequestration. The national average is 5.3 percent, Pew says.
The coming “fiscal cliff” is the result of three major changes to federal taxes and spending, all set to kick in on Jan. 1: the end of recent payroll tax cuts, the expiration of Bush-era income tax cuts and the beginning of major federal spending cuts agreed to last year, known as “sequestration.” Federal budget analysts have warned the combination could plunge the U.S. economy back into recession.
The payroll tax cuts that will close out were enacted in 2011 and 2012 as part of federal economic stimulus efforts, intended to put more money in workers’ pockets in the hope that they would spend more and pump up the U.S. economy.
The expiring Bush-era tax cuts from 2001 and 2003 were supposed to help lift the economy out of the economic dip after Sept. 11. They were originally set to expire in 2010, but the GOP and Obama White House agreed to extend them for another two years. Now there is a fight to extend the cuts again, with the president seeking to keep the tax break only for those making less than $250,000 a year — a number even his own party can’t agree on — and Republicans calling for making the tax cuts permanent.
The so-called fiscal cliff is further compounded by an agreement last August in Congress. In exchange for raising the federal debt ceiling, members pledged to cut federal spending by $1.2 trillion over the next 10 years. A “supercommittee” was formed to figure out how and where to cut, but all the group could manage was a package of automatic cuts, known as “sequestration,” divided evenly between defense and non-defense discretionary spending, that would kick in for 2013 if Congress couldn’t draft a plan to reduce the deficit by Nov. 23.
That deadline has come and gone, but sequestration can still be avoided if Congress comes to a spending-cut agreement and gets it signed into law by Jan. 2.
Colorado’s congressional delegation is deep in the mix in the fight over sequestration, tax cuts and the fiscal cliff. Three of Colorado’s Republican congressmen — Mike Coffman, Cory Gardner and Doug Lamborn— have signed a pledge that they will not vote to raise taxes, and say they plan to stick to that promise, according to
Meanwhile, Democratic Colorado Sen. Michael Bennet is working with Tennessee Republican Lamar Alexander on a three-part emergency plan that would buy Washington more time to come to a spending agreement instead of kicking off the new year by falling off the fiscal cliff.
Gayle S. Putrich can be reached at email@example.com