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Cuts, 'cliff' cloud state plans
How would 'fiscal cliff' affect state budget?

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Date published: 11/25/2012


As Gov. Bob McDonnell prepares his amendments to Virginia's budget in the coming weeks, he will do so in the face of a big unknown: how Congress might act on two budget and tax issues that could affect Virginia's economy.

Congress would have to act by January to avert sequestration cuts and the "fiscal cliff."

Sequestration is the $1.2 trillion package of budget cuts put in place during the debt ceiling deal last year. Lawmakers who approved the cuts didn't want them to actually take place; they were meant to push Congress into negotiating a different, less harsh package of cuts, but such negotiations have so far gone nowhere.

Half of those cuts would come from defense, and studies indicate that could cost up to 200,000 jobs in Virginia; the Northern Virginia and Hampton Roads economies are particularly dependent on defense and federal contracting work.

A failure to stop the sequestration cuts is expected to hurt Virginia's economy.

The "fiscal cliff" is the term for a group of tax cuts set to expire in January if Congress doesn't act to extend them. Those cuts include the Bush-era tax cuts on income, a 2-percent payroll tax cut and other tax cuts in the 2009 stimulus package, the estate tax, and some corporate taxes.

McDonnell and the state's legislative money committees are looking at how both issues would affect the Virginia budget. McDonnell said recently that, at a minimum, leaders will be cautious with their revenue forecasts and spending predictions. He has asked state agencies to prepare plans for budget cuts in case they're necessary.

According to a report on the fiscal cliff from the Pew Center on the States, letting tax cuts expire would result in higher taxes for most individuals. But it would provide more revenue to at least half of the states, including Virginia, because those states have linked their tax codes to the federal tax code. If taxpayers are paying more in federal taxes, they'll also be paying more in state taxes.

The Pew Center also said, though, that allowing all of the cuts to expire would likely cause a general economic slowdown that would "overwhelm" any separate impacts.

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