Alabamians would land hard in fiscal cliff fall

MONTGOMERY, AL (WSFA) - If Congress allows the nation to fall off the looming "fiscal cliff," Alabama almost certainly would be among the states that suffer the hardest landing.

The so-called fiscal cliff is a mixture of expiring tax cuts and automatic spending reductions that would impact residents of all states in some form or fashion if Congress does not act before January. But because of Alabama's  high number of low-income citizens and heavy reliance on federal spending, Alabamians are likely to be among those who suffer the greatest impact on their wallets and on the public benefits they receive.

The fiscal cliff is a creation of Congress and the White House, a sort of self-imposed deadline designed to force federal politicians to address the nation's growing federal debt in a meaningful way. (While they may not admit it, the president and members of Congress also were trying to put off tough decisions until after the election.)

On the tax side of the equation, a slew of prior tax reductions are set to expire. According to Keivan Deravi, an economist and professor at Auburn University Montgomery, the expiring tax cuts include a 2 percent payroll tax cut put in place by the Obama administration, tax rate reductions dating from the administration of President George W. Bush, and the alternative minimum tax.

"These three things will go into effect, which is pretty depressing to begin with because our economy is still wobbly," said Deravi.

The alternative minimum tax, or AMT, would particularly affect many middle income Alabamians.

"In the 1950s when the millionaires were discovered not paying a high enough rate, Congress  came up with a different tax rate," said Deravi. "They called it the alternative minimum tax. The income threshold was about $100,000. Now an average two-wage earner family can be at $100,000 and the alternative minimum tax rate will affect them."

He said the problem is that the AMT hasn't been updated to keep up with inflation. (In fact, the AMT has yet to be fixed for the current tax year, let alone 2013.)

A national study by the respected Tax Foundation supports the notion that Alabamians would be hard hit by the expiration of these tax cuts.

The Tax Foundation looked at four-person families in each of the states. In Alabama, a four-person family earning $63,300 a year would see their federal taxes in 2013 go up by more than 5.25 percent, or about $3,350.

According to the Tax Foundation, that would rank Alabama 12th in the nation as far as the impact of these taxes on a four-person family.

(Another point to ponder: Alabama allows state taxpayers to deduct federal taxes on their state returns. A major increase in federal taxes could reduce Alabama's state income tax revenues sharply.)

But the expiration of tax cuts accounts for only a part of the fiscal cliff.  Unless Congress and the president act before January, the nation will see major automatic cuts in spending on a variety of programs, especially defense and entitlement programs.

"Then we're going to have a cut of about $1 trillion from federal spending, which is a pretty impressive cut," Deravi said.

Of that, he said about $450 million will come from entitlement programs.

"I don't think Medicaid will be touched, but everything else will be," he said.

Another $500 million in cuts will involve defense spending.

Because so many of its residents have low incomes, Alabama relies heavily on federal entitlement programs. It also benefits from military spending more than many states.

"We are one of the largest recipients of federal spending," he said. "If that is cut, we're going to be proportionately cut."

When the Pew Center on the States looked at how the automatic spending cuts would affect various states, Alabama had a higher impact among the states in virtually every category.

But the impact of the higher taxes and lower spending contained in the fiscal cliff could go far beyond just how individual pocketbooks are hit. Some economists believe that all of these factors hitting at once could trigger a new recession.

However, I believe it is important that Congress reduce federal spending and increase revenues in order to address the burgeoning federal debt. But the key is to do it in a manageable way over time -- the equivalent of going down a steep hill versus plunging off of a cliff.

Deravi said of the effect on Alabama: "We're estimating the Alabama economy could grow about 2 percent next year. If the fiscal cliff happens, that growth could be down to zero."

"I myself believe it would  be the height of stupidity if the politicians -- if Congress and the president -- allow the fiscal cliff to happen," he said. "I don't sincerely think we're that stupid.

"But," Deravi added, "I may be the stupid one."

Alabamians should hope that Deravi is right, and that Congress and the president can find a way to work together to avoid sending the nation's economy over a cliff.


Ken Hare was a longtime Alabama newspaper editorial writer and editorial page editor who now writes a regular column for WSFA's web site.

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