By Dustin Hurst | Watchdog.org
HELENA – Federal lawmakers still cannot come together to find a solution to the coming so-called “fiscal cliff” and Montanans could see higher state and federal taxes as a result.
With just more than a month before the Bush-era tax cuts expire and huge spending cuts created by the 2011 Budget Control Act kick in, Republicans and Democrats remain at loggerheads about how to remedy the situation.
President Barack Obama’s administration maintains that no deal will be reached without raising tax hikes on the wealthiest 2 percent of Americans. Republicans generally resist the tax hikes and insist spending cuts should receive top billing in any blockbuster deal.
In other words, lawmakers offer much rhetoric but little or no progress toward an actual deal.
And that could prove costly for Montana residents.
For starters, the conservative-leaning Tax Foundation estimates each Treasure State family could see $3,258 hike in federal taxes, or about 4.96 percent of earned income. Montana ranks 27th-highest of all 50 states.
By comparison, New Jersey residents would likely realize nearly $7,000 in tax hikes, or about 6.82 percent of income, tops nationally.
Montanans would lose out on the $1,000 child tax credit included in the Bush-era tax cuts, as well an increase in the payroll tax that funds the Social Security program.
Nationally, the expiring tax cuts would mean $532 billion in new revenue flooding to the federal government’s coffers.
It also could send the economy back into recession.
More federal taxes also could mean fewer dollars flowing into Montana state government, says a recent study by the Pew Foundation.
Montana allows taxpayers to deduct money paid to the federal government from state income taxes. If taxpayers send more cash to Washington, D.C., Helena might see less, according to Pew.
Legislative fiscal and tax analyst Stephanie Morrison told Watchdog.org that a cap on the deduction could limit the dent that could put state revenue, pointing to the $5,000 cap for single taxpayers and $10,000 limit for couples.
“The effect to Montana revenue would be very small,” Morrison said.
The state actually could see more revenue because the fiscal deal curtails certain personal and corporate deductions, to which the state government links its own policies. While Pew projects certain increases in revenue for the state through retiring deductions, it could not forecast how much the state could gain.
Besides the expiring tax cuts, Jan. 1 also could bring a sharp reduction in federal spending. On that fateful day, $64 billion in reduction automatically bombard federal agencies, with $24 billion of that ripped from the Department of Defense budget.
In Montana, defense spending represents a huge sum. According to GovernmentContractsWon.com, 2,081 defense-related contracts for Montana companies meant more than $244 million flowing into the state economy. In 2010, 1,883 contracts brought $294 million to the Treasure State.
While some conservatives might boisterously cheer any slowdown in federal spending, analysts fear the immediate removal of such a large amount of market activity would lead to huge job losses and a contraction in economic growth.
The nonpartisan Congressional Budget Office suggested that diving over the fiscal cliff could raise unemployment to 9.1 percent, up from 7.9 percent now.
The federal government also likely would send less to Montana in the form of grants, contracts and support for programs, including higher education. Pew says about 19.2 percent of the state’s gross domestic production could be vulnerable to fiscal cliff reductions.
All in all, the fiscal cliff could do at least some damage to the Montana economy. Morrison’s office war-gamed possible scenarios for the state’s future and the pessimistic approach revealed millions in lost revenue to the state in coming years.
If the country heads over the cliff, causing severe contraction in the nationwide and state economies, Morrison projected the state losing $18 million in personal income-tax revenue in 2013, $32 million in 2014 and $27 million in 2015.
Keep in mind that’s from a revenue stream slated to top $1 billion next year.
Montana’s congressional delegation splits on a solution to the coming crisis.
U.S. Rep. Denny Rehberg, a Republican, wants to eliminate a planned expansion to the Medicaid program and creation of medical insurance subsidies brought about in the 2010 health care reform law, a move he says will save $1 trillion immediately. He opposes tax hikes of any kind.
Democratic U.S. Sens. Max Baucus and Jon Tester, however, favor a grand bargain of sorts, and both align with the White House in the push to raise taxes on the nation’s wealthiest.
U.S. Rep.-elect Steve Daines, a Republican set to replace Rehberg in January, could play a role in this tussle if lawmakers can’t find common ground by year’s end. Daines will push for spending cuts first and then elimination of tax loopholes that subsidize American companies.
Contact Dustin Hurst at [email protected] or @DustinHurst on Twitter.
— Edited by Kelly Carson, [email protected]