By Allison Ryan
NewsTribune Reporter and The Associated Press
Like the villain in a soap opera, talking “fiscal cliff” may give you a sense of de ja vu. The phrase first appeared early this summer, as Congress and President Barack Obama failed to come to agreement on several aspects of fiscal policy. When both parties essentially agreed to abandon policy talks until after the election, it seemed the fiscal cliff had vanished. But after a three-month campaign-induced coma, the fiscal cliff has returned to terrorize the economy, frighten investors and confuse taxpayers.
What is the fiscal cliff?
The so-called “cliff” is really a concurrence of deadlines: The expiration of tax cuts, some of which have been in place for over a decade; and automatic spending cuts.
The conditions for this dramatic deadline were set in 2010 as the result of a compromise between Obama and the new Republican majority in the House of Representatives: The package extended the tax cuts along with extending the duration of unemployment insurance pay.
Beginning in January 2010, taxpayers saw some relief through a two-percent reduction in Social Security tax, which is now expiring. All together, Forbes magazine has estimated the average American family will pay $2,000 to $3,000 more in taxes next year.
Then, in 2011, Obama and Congress set up a package to raise the debt ceiling while requiring Congress to cut spending to prescribed levels or trigger automatic spending cuts. When a “super committee” failed to bring that resolution, and no subsequent committee has answered the problem, the country continued on the path toward those mandated cuts.
What taxes will be raised?
“Every worker in America is going to see a reduction in their paycheck in the first pay period of 2013,” Mark Vitner, an economist at Wells Fargo, noted.
About 20 percent of the tax increase would come from the expiration of a Social Security tax cut enacted in 2010. This change would cost someone making $50,000 about $1,000 a year, or nearly $20 a week, and a household with two high-paid workers up to $4,500, or nearly $87 a week.
The end of the Social Security tax cut isn’t technically among the changes triggered by the fiscal cliff. But because it expires at the same time, it’s included in most calculations of the fiscal cliff’s effects.
An additional 20 percent of the tax increase would come from the end of about 80 tax breaks, mostly for businesses. One is a tax credit for research and development. Another lets companies deduct from their income half the cost of large equipment or machinery.
The rest of the tax increase would come mainly from the alternative minimum tax, or AMT. It would hit 30 million Americans, up from 4 million now.
The costly AMT was designed to prevent rich people from exploiting loopholes and deductions to avoid any income tax. But the AMT wasn’t indexed for inflation, so it’s increasingly threatened middle-income taxpayers. Congress has acted each year to prevent the AMT from hitting many more people.
Under the fiscal cliff, households in the lowest 20 percent of earners would pay an average of $412 more, the Tax Policy Center calculates. The top 20 percent would pay an average $14,000 more, the top 1 percent $121,000 more.
What spending will be cut?
The budget cuts will affect programs from the Pentagon down to hospitals and doctors’ offices that accept Medicare patients, as well as reducing funding for highways and education grants.
On a very personal level, the cuts will eliminate 73 weeks of unemployment insurance pay for those who have lost their jobs.
What does this mean for Illinois residents?
The added unknowns will be a factor as the General Assembly begins budget talks this fall. The revenue committee met Thursday for the first time since the election, to begin discussing the state’s next budget.
State Rep. Frank Mautino (D-Spring Valley) said the impact of the federal cuts on funding for state programs remains unknown, but even a 2-percentage point rise in federal withholding on income would be felt in the state economy.
“What we saw in the state of Illinois is modest growth — about 2.4 percent on our base revenue. Although it’s good there is slow growth, we still have pension obligation debt and we still have unpaid bills that we have to continue to knock down,” Mautino said. “If the tax cuts go away, the withholding tax, that puts more pressure on the state.”
Last year, the state received $33.7 billion in revenue to the general fund, through taxes and fees. Additional money from the federal government supports education, Medicaid and road construction, among other services. A loss of an unknown portion of those funds comes at a time when the state already is preparing for a tough budget year.
“We’ve got to continue to keep spending under the amount of revenue that’s coming in, and that’s going to need further cuts,” Mautino said.
On Friday, Obama and Congress began negotiations to resolve the issue, as stocks rose — reportedly on news of the talks.
White House Press Secretary Jay Carney said Obama and the legislative leaders “agreed to do everything possible to find a solution” and find a balanced approach to reduce the massive deficit.