News Analysis: U.S. Still Perched On The Fiscal Cliff

By Joshua H. Silavent, Staff Writer

January 2, 2013 – Since Election Day, just one political drama has captivated the American audience: the “fiscal cliff.”

It seemed that lawmakers in Washington had only three options available to avert the potentially cataclysmic stew of tax increases and spending cuts (known as sequestration). First, find compromise that limits tax hikes to a numbered few and ratchets back proposed reductions to domestic and defense spending. Second, procrastinate some more and back away from the cliff by postponing the effective date of all elements. Or, lastly, drive headlong over the cliff, never breaking for the edge, and hope the country doesn’t fall into another recession.

But in a surprising and acrobatic feat, Congress has taken the first two approaches at once, all the while keeping the third alternative alive and well. And so another fiscal showdown between Democrats and Republicans is promised to us over the next several weeks.

The deal struck January 1 addresses, in part, the tax side of the cliff equation. The Bush-era tax cuts for roughly 98 percent of Americans are now permanent, while individuals earning $400,000 or more – and families earning $450,000 and above – will be taxed at the Clinton-era rate of 39.6 percent.

Meanwhile, the capital gains rate for earners in the aforementioned tax brackets will rise to 20 percent, but remain at the current 15 percent rate for income earned below the threshold. Additionally, the estate tax is now 40 percent for the highest earners, up from 35 percent, with an exemption for the first $5 million in assets.

But these elements of the deal impact very few people – less than 2 percent of Americans, to be more exact. However, one provision impacts nearly every worker in the United States. Yes, the payroll tax holiday is over, bringing an end to a 2 percent discount employees received on the funding arm of Social Security.

Of course, the deal includes a litany of other incentives, stimulus and tax breaks that have some Americans breathing a sigh of relief and others in a head-scratching stupor.

For example, federal unemployment checks will continue for another year at a cost of $30 billion, helping to support those Americans who have been jobless for 26 weeks or more. Additionally, a number of tax credits for low-income families, first made law in 2009, will continue for another five years.

But businesses are getting in on the deal, too. Several corporate tax breaks – benefitting everyone from the railroad industry to NASCAR racing to Hollywood movie-making – have been extended while other taxes, such as a 1917 excise tax on rum, also carry forward. Click here to download the full text of the deal.

Despite other key, if not wonky, provisions – limits on deductions, modifications to how the Alternative Minimum Tax is calculated, pay freezes on federal employees, a nine-month farm bill extension – what is most significant and noticeable about the deal is what it lacks: a solution to sequestration. Congress, once again, kicked the can on spending cuts.

On the one hand, Republicans want to begin slashing domestic programs, particularly entitlement spending, immediately to address the nation’s debt. Perhaps they will be even more demanding in the weeks ahead now that they have given in to tax increases on the wealthiest Americans, hoping to extract concessions of their own in the next round of negotiations. And with the debt ceiling also fast approaching, you can bet the GOP will use this (as they did in August 2011) as a tool to push President Barack Obama and Senate Democrats to commit to long-term budget reform.

However, Democrats didn’t get everything they wanted in the mini-deal. Obama campaigned on returning to Clinton-era tax rates for those earning $250,000 or more, yet he compromised at a higher level. In turn, Obama is likely to push for more revenue – perhaps through new limits on deductions, closing tax loopholes or pushing for new stimulus spending – when negotiations over the debt ceiling and cuts to entitlements heat up.

And none of this even considers what should be done about automatic defense spending cuts, something Republicans loathe to contemplate and Democrats can use to bolster their negotiating position on entitlements – which, after all, remain extremely popular among Americans on both sides of the political spectrum.

So in the final analysis, it seems safe to say that after all the wrangling, nail-biting and backroom maneuvering of recent days, the United States remains perched on the fiscal cliff. Sure, it’s a less precarious place than it was before the New Year, but without serious compromise on sequestration, the fall from the cliff will hurt nonetheless – especially in the long run as debts and deficits mount. The recent tax deal simply helps to break the fall of the middle-class.

For more on the fiscal cliff and how it impacts Long Beach, check out the Business Journal's "2013 Economic Outlook" available in print and online January 15.