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Fiscal Cliff a Ticking Time Bomb for Rhode Island

Tuesday, November 20, 2012

 

Rhode Island officials say they are hopeful that a compromise to avert massive federal spending cuts by Jan. 1 will be reached, but state economic experts are warning that Congress’ failure to address the nation’s fiscal cliff would cause unemployment to skyrocket and send the state spiraling toward a recession.

“By not taking the necessary steps now to reduce the federal deficit, every Rhode Islander, every Rhode Island business and state and local government will be affected,” said University of Rhode Island Business professor Dr. Edward Mazze.

Under the Budget Control Act of 2011, Washington lawmakers are expected to craft legislation that would trim the nation’s deficit by $1.2 trillion over a decade. But if a deal cannot be reached by the end of the year, an automatic round of cuts will be triggered and the majority of American households could see a tax increase thanks to the expiration of the Bush-era tax cuts as well as the 2 percent temporary cuts to payroll taxes for businesses.

According to Mazze, a failure to address the fiscal cliff would also cause consumers to have less discretionary money to spend, businesses to be more cautious about short-term investments and hiring employees and force a reduction in business for industries with government contracts.

In a state with the second highest unemployment rate in the country (10.4 percent in October), the results would be devastating.

“If we go over the fiscal cliff, consumer and business confidence will take a beating and the chance of a recession returning to Rhode Island will be high,” Mazze said. “The unemployment rate would probably go up by two to three percentage points to about 12 percent since the defense industries in the state will have fewer government contracts. There may be a reduction in the number of federal government employees working and living in Rhode Island as agencies rationalize their operations. Retirees and investors will see the value of their portfolios decline by 20 to 40 percent.”

Governor Chafee: A Sense of Urgency

But that doom and gloom scenario is something state leaders say they hope the state will never face. Governor Lincoln Chafee joined Governors from around the country on hour-long conference call with Vice President Joe Biden to discuss the issue on Monday and said “we share a sense of urgency that there be action in Congress."

"The Chafee Administration is studying the potential ramifications for Rhode Island of a range of possible scenarios and will be prepared for any eventual outcome,” Chafee said. “There is no question, however, that ‘going over’ the fiscal cliff would be detrimental to Rhode Island in a number of ways. It is my hope, therefore, that an agreement is reached and negative consequences that will jeopardize our fragile economic recovery can be avoided.”

According to Gary Sasse, the director of the Bryant Institute for Public Leadership, not averting the fiscal cliff could force nine out of ten Rhode Islanders to see increased taxes. Sasse said the highest earners would like be “hit the hardest,” but noted that the entire state would see the effects.

Sasse said it is unlikely the state’s entitlement programs would take a hit, but noted that “other federal support” for the state could see cuts.

“The bottom line is we‘d be affected probably not dissimilar to the rest of the country,” Sasse said.

Defense Industry at Risk

Sasse said cuts to military spending could especially hurt the state.

According to a study conducted by the Defense Technology Initiative (DTI) and University of Massachusetts Donahue Institute, defense contracting in New England generated $62 billion in economic activity in 2011, and defense-led awards have increased by 85 percent since 2003. The region ranks at the top or near the top in every product and service category based on contract dollars awarded.

Rhode Island received more than $471 million in defense contracts in 2011, which made up nearly 81 percent of the federal contracts awarded to the state. An additional $391 million in defense work came from out-of-state contractors, the study found.

Some studies have predicted that Rhode Island, Massachusetts and Connecticut could lose roughly 80,000 jobs if Congress fails to act.

“The reports we are releasing today demonstrate the interconnectedness of defense spending within the New England states, with more than 319,000 workers in Massachusetts, Connecticut, and Rhode Island alone,” DTI President Chris Anderson said last week. “If Congress cannot reach a budget compromise before January, we’ll see severe cuts in those states and across the region.”

Reed & Whitehouse: Pass Middle Class Tax Cut Extension

All four members of Rhode Island’s Congressional delegation said they believe a bipartisan agreement must be reached to avert going over the fiscal cliff. Senator Jack Reed said the House should start by passing the extension of tax cuts for families making less than $250,000 a year, which passed the Senate earlier this year.

“The American people have made it clear they want the government to focus on putting Americans back to work and helping the middle-class,” Reed said. “Creating jobs is job number one, and it means Congress must work together to prevent the expiration of unemployment insurance and drastic cuts to programs like college aid that working families rely on.”

But Senator Sheldon Whitehouse accused House Republicans of holding “middle-class tax cuts hostage in order to preserve lower tax rates for the top two percent.”

“My top priority in the coming weeks is to protect middle-class Rhode Islanders from income tax hikes, and I agree with the President that we should move quickly to do so,” Whitehouse said. “In fact, the Senate has already passed legislation to shield 98 percent of families and 97 percent of small businesses from any income tax increases.”

 

Dan McGowan can be reached at dmcgowan@golocalprov.com. Follow him on Twitter: @danmcgowan.

 

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