Many states are still struggling as Congress continues to negotiate a solution to the fiscal cliff. State budgets are still feeling the effects of the 2008 crisis, giving them their own cliffs to deal with.
Some of the costs in the fiscal cliff negotiations could be shifted to states, which would only add to their current difficulties.
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For example, if federal tax deductions are capped, more income may be taxed at the state level, giving states higher tax revenues.
On the other hand, reductions in federal spending will affect federal funding. Some states get as much as one-third of their budgets
from federal grants.
Growth in Medicaid spending, federal deficit reduction, underfunded pensions, lower tax revenues, and an eroding tax base are just some of the issues states continue to face.
Economists are recommending that states become much more transparent, give better disclosures, better forecasts, and do a better job of disclosing pension risk.
This will help investor confidence and also better position them to negotiate solutions as the economy continues to improve.