Last week, the Pew Center on the States published the most precise account yet of how hard hit state revenues would be by the fiscal cliff's sequestration cuts. Relying on data from the Federal Funds Information Service, Pew found that 82% of all federal grant revenues to states would be exempt from sequestration.
On average, 6.6% of states' total revenues are subject to sequestration. The cuts will be around 8%. That means a ~.5% reduction in total revenue. Nondefense sequestration cuts would not create a general revenue crisis for state governments.
To be sure, the cuts would likely be concentrated on certain programs, whose losses would be serious (7.6-8.2%). But if states deem these programs essential, there's nothing preventing them from backfilling the loss of federal revenues. Budgets are fungible. In the case of some federal programs such as Title 1, there is evidence that state and local governments simply use federal funds to displace their own support for the same policy priority. And some programs on the chopping block, such as CDBG, would probably not be missed if they were ended altogether.
The economic threat posed by the fiscal cliff, and particularly the tax cut portion, is serious and well-documented. But the fiscal effect of the spending cuts needs to be kept in perspective.