Utah’s reliance on federal spending makes the cliff’s edge painful

As Washington, D.C., moves ever closer toward taking us off the so-called fiscal cliff (which politicians in Washington created for us in the first place), it is worth looking at what the effect on Utahns will be. The projected impacts are sobering and suggest that many Utahns will be harmed. Further, they highlight the risks that Utah faces from reliance on federal government spending.

The amount of federal funding coming to Utah that is subject to the spending-cut side of the fiscal cliff (i.e., sequestration) represents 6.9 percent of state government revenues. If the spending cuts go through unchanged, it will mean a $34 million cut to Utah’s K-12 public schools and a $43.6 million cut to state colleges and universities, according to a pair of legislative interim reports in September.

At the K-12 school level, the hardest hit will be funding that ensures children have healthy food in school ($8.8 million cut) and funding for children with disabilities ($8.5 million cut). Other areas of public education spending that would be significantly reduced include funding for schools with high numbers of low-income students ($7.2 million cut) and funding to improve teacher quality ($1.2 million). For higher education, the biggest cuts would hit the University of Utah ($27.4 million), Utah State University ($11.7 million), Salt Lake Community College ($1.4 million), and Weber State University ($1 million). Student loans remain untouched, but federal Pell grants would be cut starting in the second year of sequestration. And that is only part of the problem for Utahns.

Utah’s legislative staff analysts expect that, if we go over the fiscal cliff, Utah state government would see about a $500 million drop in state revenues overall, taking Utah from $300 million in new tax revenue in the coming year to a $284 million shortfall. That gap would have to be filled either by cutting back on government services, raising taxes and/or fees charged to taxpayers, or both.

Additionally, federal government spending has a significant impact on Utah’s economy. Federal spending on things like salaries and wages in Utah represents just over five percent of Utah’s economy. When all federal spending is taken into account (federal employee wages and salaries, federal grants to state/local government, and direct federal payments to individuals in federal programs), federal spending rises to 25 percent of all economic activity in the state.[1] In part because of our economic reliance on federal spending, the fiscal cliff (including tax increases) is estimated to lower total employment in Utah by 2.47 percent, reduce the size of Utah’s economy by 2.37 percent, and reduce real disposable personal income by 2.09 percent. In short, the fiscal cliff will mean thousands more Utahns end up losing their jobs and thousands more will have less income available to support their families.

Utah’s government and economic reliance on federal spending means that a large number of Utahns are likely to be harmed by the fiscal cliff that Washington politicians manufactured. Clearly, there are serious risks to Utahns for relying on Washington, D.C., for money on an ongoing basis.

Fortunately, however, Utah is in a better position than most states to prepare for the coming reductions in federal spending. By establishing budget processes that encourage spending less and saving more in years of growing tax revenue, Utah policymakers can help cushion the blow to Utahns from federal spending cuts. And the sooner we start making such preparations, the better working Utah families will be.

[1] CliftonLarsonAllen, LLP, Intergovernmental Financial Dependency: A Study of Key Dependency Measures for the 50 States, Table 3, 2012.

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