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Experts: Recession worst 'fiscal cliff' outcome

Published: Tuesday, Dec. 11, 2012 5:30 a.m. CST

SPRINGFIELD – Government experts who run the numbers estimate Illinois could lose $1 billion in federal revenue if President Barack Obama and Congress cannot reach a budget agreement and allow the economy to plunge off the so-called "fiscal cliff."

But more unpredictable – and perhaps more worrisome – is what impact another recession, spurred by the possible federal free fall, would have on Illinois. The state could lose an additional $1 billion because of sagging tax revenue beginning next month and running through at least mid-2014.

States are anxiously monitoring the faceoff between Democrat Obama and House Speaker John Boehner, an Ohio Republican, who are trying to reach a budget deal to avoid automatic tax increases and nearly across-the-board spending cuts that would take effect Jan. 1, a deadline set last year when the two sides reached a federal debt-ceiling pact.

"We watch that every day from Washington," Illinois Gov. Pat Quinn said last week.

Many states are worried about how to plan budgets for the coming year, based on the uncertainty. But Quinn's office won't discuss the potential fallout.

The state had enough problems to begin with. Officials predict several state agencies' programs and services won't make it through the budget year without additional money. There's also the seemingly never-ending $9 billion backlog of bills owed to vendors and a worst-in-the-nation pension program deficit, a fix for which Quinn calls his top priority.

Nonetheless, the Democratic governor has "full confidence" in Obama to broker a deal.

The national consequences are clear: Federal income taxes would increase by ending cuts implemented during President George W. Bush's administration. There would be broad-based cuts to most federal agencies, including defense spending. But money for the federal payroll and major programs such as Social Security and Medicaid would be spared.

Should the cuts go into effect, Illinois would lose $305 million in federal grants for education, public housing and nutrition programs for low-income women and children next year, according to Michael Bird, a Washington, D.C.-based lobbyist for the National Conference of State Legislatures.

Bird said the state would lose $740 million in defense money, although specifics aren't known. A spokeswoman said officials at Scott Air Force Base in southwestern Illinois had not received any instructions about potential reductions.

More hazardous could be the economic recession that's almost certain to follow a fiscal cliff dive; experts believe increased taxes and federal spending cuts could choke off business activity.

State Revenue Department officials had already predicted that receipts from the state's three largest sources – individual income taxes, corporate income and sales taxes – would drop slightly this year, and post only a 2.4 percent gain in the budget year that begins July 1, 2013. If the federal budget crisis is unsolved, those receipts would decline by just over $1 billion between Jan. 1 and mid-2014, officials say.

That amounts to about 4 percent of the estimated $27 billion those three sources would produce for the general revenue fund.

The reduction in receipts would be offset by a $45 million increase in fiscal 2014 with the expiration of Bush-era tax relief – there would be fewer federal tax deductions, meaning a higher income on which state taxes are based. For example, the state could possibly see $20 million more because businesses would be allowed less federal depreciation on equipment purchases.

A Pew Center on the States report in November found Illinois more vulnerable to the fiscal cliff's impact than others because about 8.5 percent of its revenue comes from federal sources, above the national average of 6.6 percent.

But Ingrid Schroeder, a Pew Center director, noted that recession could be far worse than cuts to federal programs.

"States have already had to make really tough budget decisions over the last couple of years," Schroeder said. "This uncertainty about exactly what their revenue is going to be makes an already difficult process that much more difficult."

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