Fiscal cliff talks could impact local construction projects - FOX 8 WVUE New Orleans News, Weather, Sports

Fiscal cliff talks could impact local construction projects


New Orleans, La. -- State and local government have a lot on the line as the fiscal cliff stalemate drags on in Washington.  Future construction projects in this area may hang in the balance.

"I talked to our lobbyist this morning... I mean they're monitoring it," said Jefferson Parish President John Young.

Fiscal experts say, if a deal is not reached by the end of December, automatic cuts in federal spending will occur, including federal grants that local communities count on.

"Major cities might get Community Development Block Grants, or they may get transportation funding and so forth.  And part of fiscal cliff is a sequester, which is an automatic budget cut, and those budget cuts could affect items which go directly into cities' budgets.  So, at some levels some mayors are complaining or worried that they will lose, like, training funds or workforce funds and transportation funds directly, right out of their own budgets," said Tulane Professor of Economics Steven Sheffrin.

It's a potential consequence of a fiscal impasse in Washington that Young hopes can be avoided.

"In fact, we've already had cuts in Community Development Block grants the first term of the Obama administration, so that would just be another further cut," said Young.

Without a deal, federal taxes will increase for everyone and economists fear that will cause Americans to seriously curtail their spending.  As a result, sales tax revenues, which local and state governments rely on, will drop.

"When people are affected directly it will have an impact on local government," stated Sheffrin.

He said there are other negative effects for Louisiana's budget if federal taxes go up across the board.  "State revenues would go down because we're allowed to deduct our federal taxes from our state taxes," Professor Sheffrin stated.

And there is also the issue of tax exemptions on interest from municipal bonds.  Currently, interest on municipal bonds is tax free, but there are discussions between the White House and House Speaker John Boehner about taxing all or a part of municipal-bond interest.

Municipal bonds help states and cities fund construction projects, and losing the tax-exempt status for those bonds would make it more expensive for local governmental entities to borrow money for capital needs.

"It appears that at the moment both parties are interested in curbing deductions as opposed to raising tax rates," said Professor Sheffrin.

"One of the attractive things about municipal bonds is that they're tax free and with the interest rates being so low, that gives us an advantage when going out to finance infrastructure projects, roads, sewer, drainage that sort of thing, so that would have implications," said Young.

"They probably wouldn't get rid of it totally, but they might cut it back and so that would raise interest rates facing municipalities and it would raise their cost of borrowing," continued Sheffrin.

Sheffrin said even now the economy is starting to feel the effects of the uncertainty over whether a deal will be reached in time. And he said no one knows how Wall Street would react if indeed the nation falls off the fiscal cliff.

"Go back to being 201-k's like before," he pondered.

Governor Bobby Jindal's administration issued a statement in response to speculation about the possible impact on state government.

"We're watching the process in Washington. At the end of the day, we will have a balanced budget that doesn't raise taxes and protects critical services. Our number one priority next year is revamping the tax code so our system is fairer, flatter and simpler for Louisiana families and businesses. Folks in Washington will continue to have problems until they face reality and make structural changes, including passing a balanced budget amendment," said Tim Barfield, executive counsel of the Louisiana Department of Revenue.

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