How the 'fiscal cliff' could impact Rhode Island

PROVIDENCE, R.I. (WPRI) - Rhode Islanders would feel the impact of the so-called "fiscal cliff" in a variety of ways if President Obama and congressional Republicans don't reach a deal to avoid it.

The fiscal cliff is a nickname for about $500 billion in federal tax increases and $200 billion in government spending cuts that are scheduled to take effect starting Jan. 1. While the changes would do a lot to balance the federal budget, economists warn that pulling so much money out of the economy so quickly could tip the country back into a recession.

The changes wouldn't hit in full on New Year's Day. Instead they would phase in gradually. Workers would see their paychecks shrink as more money is withheld to pay taxes, government agencies and programs would reduce their spending, and private employers that rely on federal funding would have to cut back.

The White House Council on Economic Advisers estimates that by the end of 2013, the tax increases included in the fiscal cliff could slow the growth of Rhode Island's $44 billion state economy by 1.4 percentage points and reduce consumer spending at Rhode Island businesses by roughly $700 million.

Here's a brief look at some of the projections about the fiscal cliff and Rhode Island, based on government projections, independent research, information provided by the state's congressional delegation, and reporting by the Washington Post policy team.

Taxes

Overall: The average American household's tax bill would go up by $3,446 in 2013 if the entire fiscal cliff takes effect, according to an estimate by the Washington-based Tax Policy Center.

Payroll tax: This is the money taken out of your paycheck to fund Social Security and Medicare. It was temporarily reduced starting in January 2011 to put more money into the economy. The tax is scheduled to go up again on Jan. 1, and most observers expect that will happen no matter what.

Income tax: The so-called "Bush tax cuts," which Congress passed in 2001 and 2003, are scheduled to expire at the end of the year. Individual income tax rates would return to the levels they were at during the Clinton administration for all households. The increase would be $2,200 for a family of four earning $82,100 a year. The amount of money withheld from workers' paychecks would increase to match the new higher rates.

Tax credits: A number of different tax credits, including ones that help parents, low-income families, college students and businesses, are all scheduled to go away at the end of the year.

Other taxes: The Alternative Minimum Tax, a higher rate that is supposed to hit only wealthy Americans, would not be updated to account for inflation and therefore would be charged to about 98,000 additional Rhode Island taxpayers. Tax rates for capital gains, dividends and inherited estates would all rise as well.

Spending

Overall: There's no precise estimate for how much government programs and services would be cut in Rhode Island, but the amount would total tens of millions of dollars.

Defense: The Pentagon budget would be cut significantly, and local defense contractors around Naval Station Newport and elsewhere in Rhode Island say they would have to lay off workers to deal with the decline in business. Companies based in Rhode Island received $455.7 million worth of defense contracts in 2011, industry estimates show.

Education: Commissioner Deborah Gist has told school committees the fiscal cliff would cut local K-12 spending by roughly $8.9 million, with large declines in funding for Title 1 aid and special education. Senate Democrats estimate nearly $2 million would be cut from Head Start in Rhode Island.

Health care: The Rhode Island Hospital Association has warned Rhode Island medical providers may be forced to lay off nearly 2,000 workers if a scheduled 2% decrease in Medicare payments actually takes effect.

Jobless benefits: Extended unemployment benefits for an estimated 8,700 out-of-work Rhode Islanders are set to expire at the end of the year.

Other programs: A long list of other domestic programs would lose funding. For example, subsidies for heating oil in Rhode Island would be reduced by nearly $1.9 million. The state budget also gets 7% of its total revenue from federal grants that would be cut, according to the Pew Center on the States.

Further Reading

•  The Washington Post's FAQ

• Pew Center on the States study  [pdf]

• Tax Policy Center study [pdf]

• Democrats' study on nondefense cuts [pdf]

• Providence Mayor Angel Taveras blog post

• Hospital Association of R.I. statement [pdf] 

• Commissioner Gist memo on RI impact [pdf]

• National Education Association report  [pdf]

• Defense industry reports on RI impact

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi's Notes blog . Follow him on Twitter: @tednesi