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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 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 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 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 already enacted by the General Assembly in state FY 2011-13.

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On Wednesday, the US House voted to suspend the federal debt ceiling—the statutory limit on the amount the US Treasury can borrow to finance existing obligations—until May, backpedaling on previous threats to withhold the debt limit increase unless Congress and the White House agreed to significant cuts in federal spending.  As a result, Congress managed to avoid default and a potential financial crisis that risked the nation’s creditworthiness and economic recovery. At the same time, however, House leaders promised to use three additional chokepoints in the budget process as leverage to secure their ultimate objective—deficit reduction based entirely on unspecified but dramatic reductions in federal spending and the transformation of entitlement programs Social Security and Medicare.

Although achieving a sustainable course for the national debt is clearly important to putting our nations’ fiscal house in order, any deficit reduction plan must take a balanced approach that includes new revenues (beyond the first step achieved in the Fiscal Cliff deal) and strategic spending cuts that do not disproportionately impact working families or damage state budgets.

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As Congress debates solutions to the “fiscal slope,” the future of the Bush Tax Cuts on incomes over $250,000 continues to play a pivotal role. Allowing these tax cuts to expire will provide over $1 trillion in new revenues—a key component of a balanced approach to deficit reduction—yet we consistently hear that taking this approach will disproportionately harm small business “job creation” and long-term economic growth.

As a new policy brief clearly demonstrates, these concerns have little merit—allowing these tax cuts to expire will have virtually no impact on the kind of small businesses that genuinely contribute to job creation. The specific tax changes under discussion would allow the 2001 and 2003 tax cuts on incomes above $250,000 to expire in 2013, thus changing the top marginal tax rate from 36 percent to 39.6 percent.  According to the report, allowing the upper income tax cuts to expire in this way would affect only small percentage of small business owners and small business income, and even those few would see no significant barrier to capital reinvestment and job creation as a result.

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As Congress continues to debate the best approach to reducing the federal debt and resolving the “fiscal slope” of looming tax increases and automatic spending scheduled for 2013, it’s critical to recognize that while everyone wants to “fix the debt,” the real questions are how to fix the debt, and who should pay to fix the debt.  Do we attempt to reduce the national debt through spending cuts alone, which would require eviscerating key public investments and core safety net programs in order to generate sufficient savings to make deficit reduction work? Or do we take a balanced approach that includes new revenues, along with smart spending cuts that spare programs vital to protecting the most vulnerable among us?

The American public has decisively answered this question during the recent election, choosing by overwhelming margins to support President Obama’s proposal to raise new revenues by asking the wealthiest Americans to pay their fair share.  According to a new survey by nationally acclaimed pollster Hart Research Associates, 61% of respondents support allowing the Bush Tax Cuts on incomes above $250,000 to expire at the end of the year, while simultaneously extending middle-class tax cuts on incomes below that threshold.   This includes 40% who strongly agree. At the same time, a strong majority of respondents (53%) rejected the proposal made by the US House of Representatives to hold the middle class tax cuts hostage to ensure passage of the tax cuts on incomes over $250,000. Only 42% supported blocking passage of the middle class tax cuts in order to secure passage of the tax cuts on incomes over $250,000 per year.

The Hart Associates survey reinforces the very similar findings of the exit polling conducted during the recent Presidential election—Americans support asking the wealthiest among us to contribute to fixing the national debt. For more details on the survey and its results, see the full polling memo here.

Earlier this week, the New York Times reported the efforts of a new bipartisan “gang” in the U.S. Senate to hammer out a framework for federal deficit reduction prior to the upcoming lame duck session of Congress. Along with grappling with long-term federal deficits, the gang is looking to address the looming fiscal challenges associated with the expiration of tax cuts passed under Presidents Bush and Obama and the threat of sequestration, the across-the-board spending cuts to critical defense and non-defense programs set to begin taking effect in January.

While the broad outlines seem encouraging, particularly the commitment to finding new revenues through tax reform, there are some concerns in the emerging framework that need to be addressed.  Along with ensuring that Medicare and Social Security benefits remain stable, perhaps the most pressing issue involves the ways in which the gang actually plans to find these new revenues.

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