The aspect that’s most relevant is the state deficit spending, including their capital accounts as well as operating accounts.

From what I’ve read, for this year they will have higher deficits than they will have next year, so that’s a negative for gdp.

If the simply tax less and spend less that means the population has that much more to spend than otherwise, and may or may not spend it, so that channel will reduce spending by the amount of the tax reduction the population doesn’t spend.

And increases in pension fund contributions by the states reduces spending that adds to gdp as well.

Municipal Cuts May Reduce GDP, Goldman Sachs Says

By Simone Baribeau

December 20 (Bloomberg) — Lower state and local spending,
which accounts for 12 percent of the national economy, may
reduce U.S. gross domestic product growth by about half a
percentage point next year, Goldman Sachs Group Inc. said.

Municipal budgets will likely increase by no more than 1
percent in 2011 after adjusting for inflation as local
governments receive less state aid and home-price declines put a
drag on property-tax collections, the bank said in a note to
clients. That is about 2 percentage points less than average.

“State and local governments will continue to face
substantial budget pressures for the time being,” wrote Andrew
Tilton, a New York-based economist, in the Dec. 17 note.
“Factors including, but not limited to, the lagged effect of
lower house prices will limit the growth of spending.”

Housing prices have fallen almost 30 percent since their
height in April 2006, according to the Case-Shiller 20-city
index. States, which will lose most federal stimulus funds next
year, are faced with closing $134 billion in budget gaps in
fiscal 2012, according to a Dec. 16 report of the Washington-
based Center on Budget and Policy Priorities. State tax
collections are 12 percent below pre-recession levels, the
report said.

Borrowing Costs

Municipal employment, which has fallen by about 2 percent
since late 2008 — compared with more than 5 percent in the
private sector — is likely to fall “a bit further” before
stabilizing in 2011, Goldman Sachs said. Large layoffs may be
avoided if localities raise real estate taxes to offset declines
in assessed property values, it said.

Municipalities are also likely to face higher borrowing
costs because of the potential end of the taxable Build America
Bonds program, which offers a 35 percent federal subsidy on
interest payments. Expiration of the program may cut the pool of
investors as borrowers revert to traditional tax-exempt issues,
boosting yields, Goldman Sachs said.

The Build America Bonds program wasn’t part of the $858
billion tax-cut plan the Senate passed last week. John Mica, the
Florida Representative who will head the House Transportation
and Infrastructure Committee next session, said last week he
planned to introduce a “reincarnation” of the program in 2011.

Goldman Sachs researchers boosted their economic growth
forecasts for 2011 and 2012 after Congress signed the tax plan.
The economy will grow 3.4 percent in 2011 and 3.8 percent in
2012, compared with previous estimates of 2.7 percent and 3.6
percent, the report said.