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Cuts, 'cliff' cloud state plans page 2
How would 'fiscal cliff' affect state budget?

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Date published: 11/25/2012


According to reports from the House Appropriations and Senate Finance committees, defense cuts are the biggest threat to Virginia's economy, because of the state's dependence on federal procurement and contracting jobs. Losses there would lead to losses in tax revenue--both sales and income taxes--for the state.

The House report said that procurement spending in Virginia totaled $59.5 billion, and $42.8 billion of that was in defense procurement. Virginia is the top state recipient of federal procurement spending per capita.

Defense cuts, the report said, are estimated to be 71 percent of the federal cuts seen by Virginia in fiscal year 2013.

Virginia is less dependent on federal grants, and would also be less affected by cuts in other areas of federal spending.

A 5 percent cut in federal procurement and salary spending would reduce federal spending in Virginia by $850 per person, the House report said. A similar cut to federal grants would be just $67 per person.

"As a result, the potential revenue reductions from sequestration far exceed the direct state spending impacts," said the House report.

Virginia actually receives less direct federal spending for grants to state and local governments than some other states, although federal grants still totaled $9.9 billion to Virginia in 2012, about 24 percent of the state's operating budget, said the House report.

In Northern Virginia, direct federal spending accounts for 36 percent of the economy, the House report said. It cited an Old Dominion University estimate that 45 percent of the gross state product in the Hampton Roads region comes from direct or indirect defense spending.

The House and Senate reports said that many areas of federal spending would be exempt from sequestration cuts--including transportation and health care programs like Medicaid.

That means the sequestration cuts would come "disproportionately" from other programs, the House report said, while states would still see overall increases in federal grant funding in fiscal year 2013 because of increases in high-growth programs like Medicaid.

The House said many of the other federal programs that would bear the brunt of sequestration cuts are not mandatory for states, but that political considerations might result in lawmakers choosing to cover the lost funding to continue those programs.

The Senate report predicted that Virginia can expect decreases in federal spending in the future, no matter what happens with the sequestration and fiscal cliff issues.

It also pointed out that the state has attempted to prepare for federal spending cuts by setting aside money--$30 million--for a Federal Action Contingency Fund, started by McDonnell in recent years.

Chelyen Davis: 540/368-5028
Email: cdavis@freelancestar.com

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