The federal fiscal cliff may still huff and puff and blow Maryland's budget down

In our recent posts, we showed that Maryland's billion-dollar-plus budget shortfalls have been eliminated due to  a combination of good financial management, the national economic recovery (tepid though it is) and some good luck.

The first wolf is called Cliff. Fiscal Cliff. 

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It's true that Congress acted early in the year to avert the worst effects of large automatic tax increases on everyone. The deal passed by Congress on New Year's Day permanently continued the income tax rate cuts for most taxpayers. It extended for five years expansions of the earned income and child credits that help mostly working and low-income households. Social security payroll taxes have increased 2 percent for virtually all workers. Emergency unemployment benefits are extended for one more year.

However, Congress deferred decisions related to automatic spending cuts and the federal debt limit. Congress has actually arranged for three "scheduled crises" to hit while Maryland's legislature is in session and working on the budget.  

1. On March 1, unless Congress does something automatic, across-the-board but cuts to federal defense and domestic programs will take effect.The cuts would be 8.6 percent of domestic programs and 9.6% of defense programs.

The Department of Legislative Services estimates that these cuts would reduce direct Federal grants to Maryland's state government by about $117 million.  

A more serious problem would be the effect on Maryland's economy (and the resulting effect on state government revenues). The Pew Center on the States estimates that federal employment and procurement make up 20 percent of Maryland’s economy: defense 10 percent and non-defense 10 percent. For Maryland DC and Virginia combined, federal nondefense jobs make up 4 percent of the region's workforce.
  
2. Congress also has to deal with the federal debt ceiling. In 2010, after an earlier budget stand-off, Congress raised the limit on federal debt to a little under $16.4 trillion. late last year, we hit that amount.The Treasury can juggle things to keep paying off existing debt and the government's expenses for a  few weeks. By late February or early March, though, those options will run out. Failure to set a new debt limit by then would result in the government defaulting on the debt and/or failing to make other payments. Most observers believe that this would cause a national and international economic crisis, while doing irreparable harm to America's credit.

3. By March  27, Congress also has to extend the government's existing appropriations.The government is being funded by a "continuing resolution" that ends on this date. If Congress does not enact Appropriations Bill (unlikely at this point) or authorize a new continuing resolution, most government operations would shut down.

If the federal government deadlocks on any of these issues, or resolves them in ways that hurt states' budgets and economies, it will cause a problem for Maryland's budget. There could be serious losses of federal revenue for Maryland and maybe some negative shocks to the state economy, which would also throw the budget out of balance. This could put the state right back in the position of needing to resolve a large budget shortfall.

So, we are not out of the woods yet.