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Protecting the state budget: Yet another reason to include new federal revenues in a sequestration fix

Posted By Allan Freyer On February 22, 2013 @ 10:00 am In NC Budget and Tax Center | Comments Disabled

The looming federal sequestration cuts have been all over the news recently, as the clock ticks down to the March 1 deadline imposed by the fiscal cliff deal.  While most media accounts have focused on the negative consequences these across-the-board spending cuts will have on defense programs and military communities, the cuts to federal non-defense domestic programs will also have profoundly damaging—if often underreported—impacts on the North Carolina state budget. In light of these impacts, Congress needs to repeal sequestration and replace these indiscriminant, automatic spending cuts with a balanced approach that includes at least one dollar in new revenues for every dollar of smart spending reductions and that protects the state budget.

Enacted in the Budget Control Act of 2011, these sequestration spending cuts were intended to automatically reduce funding for national defense and domestic programs like K-12 education, job training, Head Start, food inspects, and research and development by $1.2 trillion over the next decade if Congress could not find another way to reduce the federal budget deficit before December 31, 2013. Congress postponed that New Year’s deadline to March 1, and if Congress does not resolve this issue in time, North Carolina will experience $85.3 billion in sequestration cuts in 2013 alone.

According to a wide range of analysis conducted over the past two years, sequestration is expected to inflict significant damage on North Carolina’s economy and state budget. On the defense side, the cuts to Pentagon spending are estimated [1] to cost North Carolina at least $1.5 billion in defense contracts and as much as 12,000 in job losses.  At the same time, the non-defense cuts are also expected [1] to harm the state’s economy by reducing North Carolina’s Gross State Product by as much as $2 billion and contributing to more than 17,000 in job losses.

In a new twist on an old problem, the economic impact of these federal cuts would be magnified by the negative fiscal impacts on the state budget.  Specifically, the non-defense cuts will reduce [2] the state’s Department of Health and Human Services budget by $35 million and education spending by $84 million—reductions that come on top of the steep cuts to state funding [3] already enacted by the General Assembly in state FY 2011-13.

 

Given the negative consequences for our state’s fiscal condition and economic growth, Congress should repeal sequestration and replace it with a more balanced approach to reducing the federal budget deficit—an approach that includes new revenues in order to protect the state budget. Specifically, these across-the-board spending cuts should be replaced with an equal amount of new revenues and strategic spending cuts that will phase in over time without damaging our nations’ fragile economic recovery—a principle contained in recent proposals issued by both the White House [4] and Senator Majority Leader Reid [5]. At no point should Congress replace sequestration entirely with spending cuts to domestic programs.

Including an equal amount of new revenues would help protect the North Carolina state budget by reducing cuts to those federal programs that provide critical grants to state and local governments.  In State FY 2011-12, the North Carolina state government received [6] $18.3 billion from the federal government, a sum that constituted 35.5 percent of the total state budget (including the General Fund and various other trust funds).  When combined with grants to local governments, North Carolina received a range of direct assistance from several federal domestic programs, including [7]:

  • $951 million for K-12 education;
  • $49 million for clean water through the EPA Clean Water/Safe Water Revolving Fund;
  • $5.5 million for public safety through the State and Local Law Enforcement Formula Grants, known as Byrne Grants;
  • $76 million for child care assistance.

 Any attempt to replace the sequester with spending cuts to these federal domestic programs will place significant fiscal stress on the state budget and will likely lead to even deeper cuts to state and local government spending on these critical investments. As a result, Congress should replace sequestration with a balanced approach to deficit reduction that includes new revenues and protects North Carolina’s state budget.

 


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URLs in this post:

[1] estimated: http://www.aia-aerospace.org/assets/Fuller_II_Final_Report.pdf

[2] reduce: http://www.wral.com/news/state/video/11382098/#/vid11382098

[3] steep cuts to state funding: http://www.ncjustice.org/?q=budget-and-tax/btc-reports-fy2012-13-final-budget-underfunding-vital-investments-education-health

[4] White House: http://www.whitehouse.gov/blog/2013/02/21/balanced-plan-avert-sequester-and-reduce-deficit

[5] Senator Majority Leader Reid: http://www.washingtonpost.com/blogs/federal-eye/wp/2013/02/14/senate-democrats-propose-plan-to-avoid-sequester/

[6] received: http://www.osbm.state.nc.us/files/pdf_files/2011PLS_rev.pdf

[7] including: http://www.offthechartsblog.org/what-deeper-cuts-in-non-defense-discretionary-funding-would-mean-for-states-and-localities/

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