Federal Deficit Reduction Overview


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U.S. Supreme CourtUpdated March 11, 2013

In Brief: NCSL is closely monitoring the debate over federal deficit reduction with an eye toward what the impact might be on states. This page features updates on actions affecting deficit reduction. We've also included a brief recap of the deficit reduction debate during the past three years. Check back regularly for updates.

Sequestration Update

Below you can find a 50-state summary table displaying the impact sequestration will have compared to FY 2012 and FY 2013 funding levels in the Federal Funds Information for States (FFIS) database. The chart exhibits the state-by-state impact of both the March 1 sequester and the March 27 sequester. The latter sequester will occur as a result of current funding for FY 2013 exceeding the caps put in place by both the Budget Control Act (BCA) and the American Taxpayer Relief Act (ATRA). Federal Funds Information for States has updated its grants database to reflect changes in the BCA sequester included in the ATRA.

For program specific information by state, please view FFIS’ full grant database.

The lack of fiscal clarity in the nation's capitol is leaving state lawmakers increasingly uncertain about the amount of federal reductions to expect in FY 2013 and beyond. Sequestration, which was established in 2011's Budget Control Act and modified in January's American Taxpayer Relief Act, is began on March 1, 2013. It's possible that March 27—the current deadline for the continuing resolution funding the federal government for FY 2013—will become the new target date to possibly modify sequestration.

The $85 billion in sequestration cuts for FY 2013 are split evenly between defense and nondefense spending. While almost all cuts to defense spending are included except military personnel, a number of nondefense discretionary programs are exempt. These include Medicaid, Temporary Assistance for Needy Families (TANF), Children's Health Insurance Program (CHIP) and a majority of transportation programs. Programs that are covered, or nonexempt, include education, energy, environment, employment and training, and justice, among others. States can expect an estimated 5.9 percent across-the-board reduction in FY 2013 for federal nondiscretionary funds, with reductions of 7.3 percent for defense discretionary accounts.

Both the House and Senate introduced legislation that would have either eliminated or amended sequestration. During the last week of February the Senate proposed legislation that would eliminate the first year of sequestration for $110 billion in spending cuts and revenue increases. Earlier in February, the House discussed an alternative that would replace sequestration by reducing the federal workforce by 10 percent and freeze lawmakers' salaries for 10 years.

On March 1, the Office of Management and Budget released a memorandum providing detailed analysis of the the implementation of sequestration. This memo can be viewed here.

On Feb. 24, the White House released state-by-state reports on the impact of sequestration. These reports can be viewed here.

Federal Budget/Sequestration/Fiscal Cliff Timeline

The No Budget, No Pay Act (H.R. 325)

On Wednesday, Jan. 23, the House passed H.R. 325, the No Budget, No Pay Act. This legislation postpones the looming debt limit until May 18, at which time the debt ceiling will be automatically increased by the federal government's new outstanding obligations. The legislation also includes a unique mechanism tying the ability of both chamber's of Congress to pass a budget resolution to members of Congress receiving their salary. The Senate and administration have signaled a willingness to pass and sign into law, respectively, H.R. 325 next week.

The American Taxpayer Relief Act (H.R. 8)

On Jan. 3, the president signed into law the American Taxpayer Relief Act (H.R. 8), legislation addressing the fiscal cliff. Congress and the administration will now need to address the nation’s statutory debt limit in February, while in March sequestration will begin and funding for the remainder of FY 2013 will expire. Read NCSL's summary of H.R. 8 here.

Budget Proposals

The president and House Republicans have offered contrasting budget proposals in recent days. The administration's plan would include $1.6 trillion in new revenue, with a majority coming from the expiration of tax cuts for high-income earners, and a $50 billion stimulus for infrastructure spending. Treasury Secretary Timothy Geithner hinted at substantial savings in Medicare and entitlement programs, but nothing concrete was proposed. The plan would postpone the looming sequester cuts and would propose increasing the debt limit without congressional approval.

In response, Republican leadership offered a framework with $2.2 trillion in savings, consisted of $1.4 trillion in spending cuts and $800 billion of revenue increases. The proposal would extend the 2001/2003/2010 tax cuts for a year and save upwards of $200 billion from changing inflation for Social Security recipients.

Fiscal Cliff

After the Nov. 6, 2012, election, both President Obama and Speaker Boehner issued statements urging a settlement to be agreed to regarding the looming fiscal cliff. On Nov. 8, the Congressional Budget Office released a report discussing the consequences federal inaction on the fiscal cliff would have on the nation's economy. The remarks by President Obama and Speaker Boehner, along with CBO's document, can be found below.

Sequestration Report

In August, Congress passed and the president signed legislation requiring the administration to provide comprehensive analysis of sequestration's potential affect on both domestic discretionary and defense programs. The White House released this report on Friday, Sep. 14, and can be viewed here. Read NCSL's Summary of OMB Sequestration Report and How Sequestration Cuts Will Affect States in FY 2013.

Continuing Resolution

On Sept. 22, the Senate followed the House of Representative's lead and passed a six-month continuing resolution (H.J.Res. 117). The president is expected to sign the bill into law this week. H.J.Res. 117 can be viewed here.

Highlights of H.J.Res 117 include:

  • Funding the federal government for the next six months until March 27, 2013.
  • A funding level of $1.047 trillion, as required in the Budget Control Act.
  • Increasing spending for most programs and agencies by 0.6 percent.
  • Requiring each department and agency to submit spending, expenditure and operating plans to House and Senate Appropriations Committees, with sequestration updates included.
  • Requiring the Office of Management and Budget to report monthly on all obligations from each federal department and agency.
  • Limited changes to federal grants and programs. The continuing resolution does include increased funds for the Commodity Assistance Program and additional expenses for both the U.S. Customs and Border Protection and the Department of Veterans Affairs.


The math is simple: The federal government currently raises 60 cents for every $1 it spends. A procession of unfunded and underfunded policy decisions—wars in Iraq and Afghanistan, Medicare Part D, bailouts, stimulus, perennial extensions affecting the alternative minimum tax and Medicare provider reimbursements, for example—coupled with revenue shortfalls generated by the 2001, 2003 and 2010 tax cuts and lower economic growth have conspired to drive federal deficits over $1 trillion for four years running and amassed a national debt that now exceeds $16 trillion.

Numerous deficit commissions, most notably the National Commission on Fiscal Responsibility and Reform headed by Erskine Bowles and former Wyoming Senator Alan Simpson, have generated a consensus on the fiscal fixes that are needed.  That consensus includes discretionary spending reductions, tax reform and revenue growth, entitlement reform,  all tied up in an “everything must be on the table” package. A number of congressional efforts and administration-congressional leadership negotiations at different times during 2011 and 2012 have all identified similar fixes,  but bipartisan agreement has proven elusive.

This lack of agreement and a host of pending policy sunsets created the "fiscal cliff" that loomed at the end of 2012. In the “cliff” mix were end-of-year sunsets for the aforementioned tax cuts and numerous tax credits and deductions. It also contains Medicare provider reimbursements, alternative minimum tax expansion and a potpourri of state-federal program reauthorizations such as the Temporary Assistance for Needy Families block grant, No Child Left Behind Act, Workforce Improvement Act and a farm bill. Waiting in the wings on March 1, 2013, is sequestration, across-the-board domestic discretionary spending cuts (8-9 percent for FY 2013) and defense discretionary spending cuts (10 percent for FY 2013), which will upend state budgets and economies.

And later in 2013, the federal debt ceiling will be reached and the credit worthiness of the nation and of states will be challenged. This most recently occurred in 2011 and resulted in a Standard and Poor’s downgrade of the federal government’s credit rating. It also threatened five states with downgrades: Maryland, New Mexico, South Carolina, Tennessee and Virginia.

The fiscal and economic impact of the federal deficit and the national debt is hydra-headed. Talk in Washington, D.C., generally swirls about how to save money or raise revenue for the federal government only. Exporting all or part of the federal deficit to states is not an impossibility. For example, state-federal discretionary and other grant programs constitute approximately 12 percent of the federal budget. Many see them as the “softest” or most vulnerable part of the budget. Think sequestration and its targeted reductions to education, energy, social services, job training, environment and justice programs.

NCSL’s leadership created a Deficit Reduction Task Force in December 2010 in anticipation of ultimate federal action—and with the understanding that any federal action would have enormous state-federal implications.

The task force's recommendations included support for a comprehensive "everything on the table" deficit reduction package; a willingness to share in reasonable discretionary and entitlement program spending cuts; avoidance of new unfunded mandates, preemption and cost shifts; enactment of the Marketplace Fairness Act; and protection of public works investments. Knowing Medicaid will be a deficit reduction topic, statutory counter cyclical assistance and administrative relief are also recommended. Additionally, any deficit reduction effort could present opportunities to restructure administrative and funding aspects of various state-federal programs.