MONTGOMERY — The fiscal cliff agreement in Washington will cut funding for Alabama's public schools and colleges by at least $70 million annually, state financial experts predict.

The talk in Washington about federal budget cuts could cost the state even more.

The fiscal cliff settlement, reached New Year's Day, affects Alabama differently because it is one of the few states that gives its citizens a state income tax deduction for federal taxes paid.

The federal settlement allowed a temporary reduction in payroll taxes for Social Security and Medicare to expire.

It also raised the tax rates on individuals making more than $400,000 and couples making more than $450,000.

The change in payroll taxes affected nearly all workers, while the tax rate affected the wealthiest 1 percent of Americans.

With higher federal taxes, Alabamians will get to deduct more on their state income tax returns and pay less state tax.

The impact will be felt by public schools and colleges in the next fiscal year because Alabama earmarks its income tax revenue for public education.

Norris Green, director of the Legislative Fiscal Office, said the Social Security tax change should cut Alabama's income tax collections by $60 million a year.

The higher tax rate on the wealthiest citizens should reduce Alabama's collections by $10 million to $15 million annually.

That's more than 1 percent of the $5.6 billion education budget the governor is recommending for the 2013-2014 school year.

State finance director Marquita Davis recently told legislators she concurs with Green's predictions.

Raises

Before the fiscal cliff settlement, state officials had been talking about giving public school employees their first cost-of-living increase since fall 2007.

Figures ranged as high as 10 percent until the fiscal cliff settlement tempered the talk. Now the governor is recommending a 2.5 percent raise for the upcoming school year. That raise is expected to cost $83 million, Davis said.

Green and Davis said Alabama may also feel an impact from current talks about federal budget cuts.

If federal taxes are raised to prevent some cuts, that will impact Alabama's state collections.

Cuts in federal spending, particularly in defense areas that are a big part of Alabama's economy, could reduce the amount of state income tax collected.

Neither official is making predictions about amounts because they said it is too early in the negotiations. But a recent study by the Pew Center on the States shows what is at stake.

Study findings

The study found that federal spending in Alabama on procurement and salaries accounted for 8.9 of the state's gross domestic product in 2010.

The national average was 5.3 percent.

The bulk of federal spending in Alabama was related to defense, and it provided stable economies around large military bases and aerospace companies in Huntsville, Mobile, Ozark and Montgomery.

Defense spending accounted for 7 percent of Alabama's GDP. That's twice the national average.

In 2010, defense procurement contracts in Alabama totaled $10.4 billion.