The Impact of the Fiscal Cliff on Local Governments

By Sam Williford, Associate Consultant

As Congress works to find a solution to the ‘fiscal cliff’ by the end of the year, the federal budget is hardly the only player involved. Without a compromise, state and local governments, which are required to keep balanced budgets, would feel the effects from less federal support. This could then result in a devastating economic impact.

“The fiscal cliff is not just a federal issue,” Anne Stauffer, a project director for the Pew Center on the States, a national nonprofit think tank based in Washington, D.C. said (Pocono Record). “The implications for states should be part of the discussion so that problems are not simply shifted from one level of government to another.”

As the following chart shows (from BusinessInsider), several states rely heavily upon federal spending:

While the federal government gets the vast majority of its revenue from income and payroll taxes, state and local governments tend to rely more upon sales and property taxes to support operations. These operations include workforce development and entrepreneurial support, both of which are projects Fels has worked on in the past year. A reduction in federal funding will inevitably shift greater costs to other governments that would threaten the funding of such initiatives.

That could also lead to lower economic growth. According to a report released today (PDF) by the Congressional Budget Office, national GDP could contract by as much as 1.3 percent in the first half of next year, if nothing is done. This would be another factor that would put additional pressure on government budgets, due to falling revenues coupled with a need to spend more on support services.

State governments have already attempted to shift costs onto counties and cities in an effort to balance budgets. In Maryland, the state has proposed moving teacher pension costs onto its counties to save hundreds of billions of dollars. In the wake of the country going over the fiscal cliff, more of such behavior would likely occur, as governments do their best to pass costs elsewhere to take pressure off beleaguered budgets.