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Sequestration and the Dire Effects to State Budgets

With Congress set to convene to tackle sequestration and the fiscal cliff, the talk has once again centered around federal budget cuts and their potential effects. Tax hikes are back on the table, according to a few prominent Republicans this weekend. A large number of difficult military cuts looms. But few are thinking about the other layers of public spending that will be affected. State budgets will see massive effects from a potent mix of direct spending cuts and revenue reductions based, ironically, on the expiration of the Bush Tax Cuts.

Using my home state of Oregon as an example, the all funds budget faces a total cut of $6 Billion from a combination of direct funding cuts, loss of matching funds in federal programs and reduced revenue from federal tax INCREASES that are deductible on state returns. That’s a pretty big slice out of a total all funds budget of about $58 billion.

Our all funds budget is funded by 3 main components: 1. General funds, including state tax revenues, approximately $13.71 Billion; 2. Federal funds, approximately $14.9 Billion; and 3. Other funds, approximately $29.1 Billion. The Other Funds portion is the user fees, licensing, etc. – essentially a de facto consumption tax disguised as permitting fees. So really, that $6 Billion cut is being taken out of a budget of around $29 Billion, or a little more than 20%.

And where are those cuts coming from? According to State Senator Brian Boquist, there are several sources:

1. Direct federal fund cuts

2. Tax revenue on the Bush Tax Cuts

Ironically, because federal taxes are deductible on state returns, as federal taxes go up, state revenues are cut. When the Bush Tax Cuts are repealed, not only will it hurt the pocketbook of each individual, but state revenues will also decrease.

3. Tax revenue on federal programs

For example, federal unemployment benefits are taxed at 9%. As that program is curtailed, state tax revenue is reduced.

4. Backfilling on federal matching fund programs

Programs such as TANF (food stamps) provide matching funds. States like Oregon agree to fund a certain amount of the program in exchange for the federal matching funds. So if Oregon does not want to cut a program like TANF then it must use State funds to backfill.

Word around Salem, in talking to several legislators, is that the Democrats really don’t have much of a conception of how much impact these budget cuts will have. It’s apparent that they haven’t wrapped their heads around how much funding they’re going to have to backfill if they want to keep current spending levels unchanged.

Of course, this realization is not likely to make them change their profligate spending ways – after all, Oregon’s general funds spending increased almost 50% between 2005 and 2009.

Which begs the question – is sequestration actually a good thing? Our state legislators have become accustomed to this increased spending. Is this the only way we’ll ever get them to stop spending money or will they just raise taxes to try to fill the gap?

If past performance is any indication of future behavior, prepare for the latter. 

teda's picture
Ted Abram


Very thoughtful review. Even though I am an Oregonian, I have not remained current on Oregon's dependency on the federal government. I am aware that in the 1990's Oregon never had a self-sustaining budget. The governors and legislators allegedly balanced the budget by using tobacco settlement money to offset the lack of state revenue, and other such gimmicks. Again, most appalling from your review is Oregon's dependence upon the federal government. Stated differently, Oregon has been seduced by federal matching funds, which also bring strict rules and regulations. Thus today, if sequestration occurs Oregon has a 20% reduced revenues. Worse, the federal mandates remain as law. Obviously, over the years legislatures and governors have permitted the federal government to essential determine policy and revenue schemes for the people of Oregon. This is terrible governance by Oregon's elected officials. In reality, all of the programs unemployment, foods stamps and many more not mentioned should be strictly Oregon promulgated and controlled programs. My suggestion is a grand bargain with the federal government. Oregon does not sent a large portion of our income tax dollars to DC. In return we use our Oregon earned dollars to operate the programs Oregonians deem beneficial to our fellow citizens. This will produce more humane discernment with people in need. It will also be much more efficient.

LT1800's picture
Jeff Reynolds

Thanks for the comment, Ted. Whenever people gripe about the state budget here, it's always about the 50% funded by licensures and fees - rightly so, I might add. But when we're getting ~$15Bil from the Feds, with the massive strings attached, something is deeply flawed. What it really means is that our balanced budget requirements just don't have any teeth.