WASHINGTON — If the nation goes over the “fiscal cliff” next month, people with a close eye on North Carolina’s economy say that a combination of higher taxes and automatic spending cuts – especially in defense – would mean more lost jobs.
A deal in Washington between Speaker of the House John Boehner, R-Ohio, and President Barack Obama might prevent the automatic austerity measures known as the fiscal cliff. But with little information on progress spilling out of the nation’s capital and a history of partisan battles, North Carolinians are talking about what failure in Washington would look like at home.
If the middle-class tax cuts expire, for instance, a North Carolina family of four that earns the state’s median income of $63,700 a year might see an income tax increase of $2,200, according to the White House. As people with higher tax bills spend less, many experts say a recession is likely.
Meanwhile, automatic spending cuts would hit research institutions, education, social services and the military. North Carolina would see $420 million less in military funding and nearly $200 million in non-defense federal support, according to the Federal Funds Information for States, a group that tracks government spending.
Amid all these potential pitfalls, companies large and small are bracing for an economic downturn. About 29,000 people in the state might be out of work next year as a result of the spending cuts, according to Stephen Fuller of George Mason University in Virginia.
Harvey Schmitt, the president and CEO of the Greater Raleigh Chamber of Commerce, said going over the fiscal cliff was the wrong way to reduce the budget deficit.
“Basically what you’re doing, you’re driving down the street and you slam your gear into park. It’s going to rip up the inside of your car,” he said. “Yes, you’re going to get things stopped, but the stop would be less expensive if all the parties agreed to a compromise.”
In North Carolina, the employers who do business with military bases and other military spinoff companies are seen as engines of economic growth, said James Kleckley, the director of the Bureau of Business Research at East Carolina University.
“If you started to see activity at the bases being cut back again, you’re more than likely to see those contractors cut back, too,” he said.
The other big factor for the state is the prospect of another recession.
“When we look at economic development in North Carolina, the growth of jobs, the growth of income, the biggest driver of economic activity is the health of the national economy,” Kleckley said. “When the national economy slows, we’re going to be slowing.”
At the LORD Corp., a growing mechanical and chemical products company with world headquarters in Cary, Rick McNeel, the company’s president and chief executive officer, said the company was concerned about military cuts because about 15 percent of its business was in defense aerospace work
“Fortunately, we’ve been growing in that area, so hopefully it won’t totally kill us,” he said. “But it could impact our hiring plans and eventually cause problems beyond that in terms of cutbacks in staff.”
LORD, which has annual sales of more than $720 million, employs 2,940 people, about 2,200 of them in the United States. About 350 work in Cary in marketing, management, and research and development. The company manufactures and sells adhesives, coatings, and vibration and motion control devices in the United States, Asia, Europe and South America.
The sudden expiration of all the tax cuts and the automatic reductions in federal spending if no budget deal can be reached are expected to set off a new U.S. recession. That would have a major impact on 85 percent of the company’s business, which is in non-defense work, McNeel said.
In Cumberland County, near Fort Bragg, about 40 percent of the region’s business is defense-related. If there are cuts in military spending, “that trickles down to everybody here,” said Brandon Plotnick, the marketing and communications coordinator at the Fayetteville-Cumberland County Chamber of Commerce.
The automatic cuts also would trim about 8 percent from federal non-defense spending, including money for education and social services. That would mean reductions in help for the poor, including Head Start and rental subsidies.
State Superintendent of Public Instruction June Atkinson told a Senate Appropriations Committee panel in July that in North Carolina, as in other states, educational revisions supported by federal money have been aimed at raising student achievement and high school graduation rates.
The fiscal cliff would mean a reduction of $30 million in federal money for high-poverty schools in North Carolina and perhaps 500 fewer school jobs in the state, she said.
Other federal spending goes to schools that have many children whose parents are in the military.
“We can’t afford to lose any money for the school system,” said Phyllis Owens, the director of the Harnett County Economic Development Commission.
Automatic federal-spending cuts also would mean $750 million less for science funding for research institutions in North Carolina through 2017, according to the American Association for the Advancement of Science.
Protesting the possible cuts, more than 6,000 science and engineering students delivered petitions recently to every senator and the leadership of the House of Representatives, saying the nation’s future economic prosperity would depend on advances in science and technology.
Colin Funaro, a graduate student in entomology at North Carolina State University who delivered the petition to Sen. Kay Hagan, D-N.C., said that scientists, including graduate students and professors, “are fighting an uphill battle” for funding already, and “these cuts would make that struggle all the more difficult.”