Grants Subject to ‘Fiscal Cliff’ Make Up 7.7% of TN State Revenue: Report

Because of Tennessee’s reliance on federal grants, the state is among those that would be most severely affected if Congress takes no action to avert the so-called fiscal cliff, according to a recent study.

The study by the Pew Center on the States gauged the effect of the planned cuts to federal spending, which, paired with tax increases set for January, have come to be known as the fiscal cliff because of its possible economic impact.

Pew looked at the federal grants subject to the cuts as a percentage of state revenue, based on fiscal year 2010 numbers. In Tennessee, such grants made up about 7.7 percent of revenue, putting the state in the top five in terms of impact, behind South Dakota, Illinois, Georgia and Texas.

The study also broke down federal spending by area: defense versus that spent on all other programs.

In the breakdown by nondefense spending, Tennessee ranked in the top 10.

Nondefense spending via the feds made up 3.1 percent of Tennessee’s gross domestic product in 2010, a measure used to measure economic output, the study says. The national average is 1.8 percent.

By the broader measure of federal spending on defense and other areas as a percentage of GDP, the state appears to be more independent of action or inaction in D.C. That figure is 4.9 percent, coming in below the national average of 5.3 percent.

Tennesseans are shielded from the tax increases that may come into play for residents of states that link income taxes to federal tax provisions. However, the Tennessee’s estate tax is linked to changes at the federal level, the study notes.

A primer on the tax implications of the fiscal cliff is available at the Tax Foundation website.