Governors urge action to avoid tumbling off 'fiscal cliff'

They don’t have a formal seat at the “fiscal cliff” negotiating table, but for the nation’s governors, the stakes couldn’t be higher.

A failure by Congress and the White House to reach a deal over spending cuts and tax increases by the end of the year would blow a hole in state budgets and cause a likely recession, a bipartisan group of governors said after meeting with President Obama and Vice President Joe Biden at the White House.

“The sooner that this gets resolved ... the better off we’ll be,” Gov. Jack Markell (D) of Delaware, chairman of the National Governors Association (NGA), told reporters. He was joined by the Republican governors of Wisconsin, Utah, and Oklahoma, and the Democratic governors of Arkansas and Minnesota –all members of the NGA’s executive committee.

Governor Markell added that a longer-term fix is preferable to one that lasts just a few months. State governments, like businesses, need certainty so they can plan. And unlike the federal government, they cannot print more money if they run a deficit.

The states stand to lose about 18 percent of federal grant money if across-the-board spending cuts known as the “sequester” go into effect, according to the Pew Center on the States. All told, one-third of total state revenues come in the form of federal grants.

But amid Washington’s ultrapartisan atmosphere, the governors presented a unified front, opting not to take sides.

“Our focus today was not to endorse a specific plan, nor to dismiss a specific plan, but rather to point out ... as governors, we think it’s important that we have a seat at the table,” said Gov. Scott Walker (R) of Wisconsin. Governor Walker, a rising GOP star who survived a recall election last year over his moves against public-sector unions, declined to discuss any presidential ambitions for 2016.

Another Republican governor, Mary Fallin of Oklahoma, said the group asked for “flexibility” in how federal money and spending cuts are passed down to the states, so that political leaders can “do what’s in the best interest of our states.”

Markell of Delaware expressed particular concern about future funding for Medicaid, a federal-state health-insurance program that services low-income and disabled people. Mr. Obama’s health-reform law, which goes into effect in 2014, includes the option for states to expand eligibility for Medicaid, with a large federal subsidy to support it. Medicaid is exempt from the sequester, but theoretically it could face cuts in any “grand bargain” that Obama and the Republicans eventually reach on long-term deficit reduction.

Delaware opted to expand Medicaid, as have many other states, mainly those with Democratic governors. “In our case, we made that decision because of the underlying economics, the fact that there is a higher reimbursement for the population that we’re already serving,” Markel said, according to the Wilmington News Journal. “Clearly if that were changed, we would have to revisit that decision.”

Walker of Wisconsin said he wasn’t worried for now about the fiscal cliff deadline, aware that negotiations often go right up to the end.

But if anything, the president seemed as adamant as ever in his position that Republicans must accept a higher tax rate on the wealthiest 2 percent of households in any “fiscal cliff” deal. In an interview Tuesday with Bloomberg TV, Obama said that to balance out the spending cuts that have already been made and the entitlement reforms that he’s prepared to make, tax rates on the top 2 percent have to go up.

“And we’re not going to be able to get a deal without it,” the president said.

Obama would not specify an exact tax rate that the top earners must go to. If the Bush-era tax cuts expire, the top marginal rate will go from 35 percent to 39.6 percent. In his daily briefing, White House press secretary Jay Carney suggested that there's some wiggle room on exactly what top rate Obama would accept. But he and the president are clear on the core principle: that the marginal tax rate must rise on income above $250,000 a year.

After the White House meeting, the governors headed to Capitol Hill for meetings with Republican House Speaker John Boehner and Senate majority leader Harry Reid (D).

The office of Speaker Boehner released a statement after meeting with the governors, emphasizing his point that raising taxes on top earners would negatively affect small-business owners, many of whom file taxes as individuals.

"I will continue to urge governors of both parties to talk to small businessmen and women in their states about the impact it will have on small businesses if Washington raises their tax rates, as President Obama is demanding, rather than cutting spending and reforming entitlement programs,” the speaker’s statement said.