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The Fiscal Cliff
What is the Fiscal Cliff?
The so-called “fiscal cliff" refers to a combination of tax increases and automatic, across-the-board spending cuts set to begin under current law in January 2013. Below is a more detailed look at exactly what changes at the beginning of the year.
Taxes
According to the Tax Policy Center, if the current tax provisions are allowed to expire, about 90 percent of all Americans will see their taxes raised. This increase would be the largest tax hike in American history.
Expiring Taxes and Policies by the Numbers
The following provisions are just the highlights. In fact, dozens of tax provisions affecting individuals and businesses expire at the end of the year. You can read the Congressional Research Service report An Overview of Tax Provisions Expiring in 2012 by clicking here. You can find more detailed information on each tax provision by clicking the hyperlink at the beginning the bullet point.
Bush-era tax cuts:
- Marriage Penalty Relief – Will expire, which means married couples who are low- or middle- income earners will pay more in taxes than if they were to file separately
Other tax increases:
- The Estate Tax – The top tax rate will jump from 35 percent to 55 percent and the exemption level will fall from $5 million to $1 million costing taxpayers $40 billion
- 2 Percent Social Security Payroll Tax Holiday – Originally passed as a temporary payroll tax holiday and then extended through 2012. If Congress takes no action, the rate will be raised back to the normal rate of 6.2 percent from the current rate of 4.2 percent
- Alternative Minimum Tax - Originally created to ensure that wealthy tax payers pay a certain share of their income, but without an adjustment for inflation from Congress it could affect 26 million extra taxpayers costing $40 billion
- State Sales Tax Deduction - Under current law, taxpayers can deduct state income taxes from federal income. However, the temporary deduction for sales taxes in lieu of income taxes expired December 31, 2011. For a state like Texas that does not have an income tax, if nothing is done, Texas residents will no longer be able to deduct their state sales tax
New Taxes:
- ObamaCare – A number of taxes to support the implementation of the 2010 Affordable Health Care Act take effect in January 2013
Other policies expiring:
- Medicare Reimbursements to Physicians - On February 17, 2012, the House and Senate passed legislation that will prevent cuts to physician reimbursements through the end of this year. Unless Congress acts to override the cuts, physician reimbursements would be reduced by 27 percent in 2013, which would dissuade doctors from accepting Medicare patients
- Farm Bill - The 2008 Farm Bill generally expired on September 30, 2012. Dairy policy expires on December 31, 2012, and other commodity support expires with the 2012 crop year. Without an extension or a new Farm Bill, farm policy will begin to revert back to permanent law from the 1930's and 1940's that is seen as undesirable and has been suspended by modern Farm Bills
- Production Tax Credit (PTC) - Without an extension, wind projects placed in service on or after January 1, 2013, will not be eligible to receive the PTC
- Unemployment Insurance - The emergency unemployment compensation program is currently set to expire towards the end of this year along with the 100 percent federal financing of the Extended Benefits program
Automatic Spending Cuts
The automatic spending cuts or sequestration are mandated in the Budget Control Act to reduce the deficit by $1.2 trillion over 10 years. The cuts come from both domestic and defense spending, but many programs are exempt. Although defense spending makes up only 19 percent of the federal budget, it will account for 50 percent of the deficit reductions in the sequestration. There is widespread and bipartisan agreement that these cuts would have a severe impact on America’s national security and further harm the economy. These across-the-board cuts to defense would come on top of the nearly half-trillion dollars ($487 billion) in cuts already being implemented.
Spending cuts by the numbers
- Defense – There will be approximately a 10 percent cut to each program, project, and activity in the defense budget, which will total $55 billion in 2013. An additional 100,000 troops will be cut from the Army and Marine Corps resulting in the smallest ground force since 1940. Our Naval fleet will shrink to its smallest size since 1915, and the Air Force will be reduced to its smallest tactical fighter force in its history
- Exemptions to the defense budget - Military personnel accounts including pay and healthcare will be excluded from sequestration
- Nondefense – The cuts will result in an estimated 8 percent cut to every program, project, and activity in domestic programs that are not exempt, which will include education, job training, medical research, food safety, national parks, border security, and air travel
- Exemption to nondefense cuts - Include much of Medicare, Social Security, Medicaid, and Food Stamps
Reports on the Fiscal Cliff
Reports on Automatic Spending Cuts
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