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Home / Commercial Construction / Falling off ‘fiscal cliff’ will drop federal highway spending 8 percent

Falling off ‘fiscal cliff’ will drop federal highway spending 8 percent

By Christopher S. Rugaber
Associated Press

Dana Pinero (foreground) of New York waits in line to mail tax returns for both herself and her boyfriend April 15, 2008, at the James A. Farley Main Post Office in New York. The package of tax increases and spending cuts known as the “fiscal cliff” takes effect Jan. 1 unless Congress passes a budget deal by then. The economy would be hit so hard that it likely would sink into recession in the first half of 2013, economists say. (AP file photo by Tina Fineberg)

WASHINGTON — Everyone who pays income tax, and some who don’t, will feel it.

So will doctors who accept Medicare, people who get unemployment aid, defense contractors, air traffic controllers, the construction industry and companies that do research and development.

The sequester, or package of tax increases and spending cuts known as the “fiscal cliff,” takes effect in January unless Congress passes a budget deal by then. The economy would be hit so hard that it likely would sink into recession in the first half of 2013, economists say.

And no matter who you are, it will be all but impossible to avoid the pain.

Middle income families would have to pay an average of about $2,000 more next year, the nonpartisan Tax Policy Center has calculated.

As many as 3.4 million jobs would be lost, the Congressional Budget Office estimates. The unemployment rate would reach 9.1 percent from the current 7.9 percent. Stocks could plunge. The nonpartisan CBO estimates the total cost of the cliff in 2013 at $671 billion.

Collectively, the tax increases would be the steepest to hit Americans in 60 years when measured as a percentage of the economy.

“There would be a huge shock effect to the U.S. economy,” said Mark Vitner, an economist at Wells Fargo.

Most of the damage, roughly two-thirds, would come from the tax increases. But the spending cuts would cause pain, too.

The bleak scenario could push the White House and Congress to reach a deal before year’s end. Still, uncertainty about a final deal could cause many companies to further delay hiring and spend less. Already, many U.S. companies say anxiety about the fiscal cliff has led them to put off plans to expand or hire.

A breakdown in negotiations also could ignite turmoil in financial markets, Vitner said. It could resemble the 700-point fall in the Dow Jones industrial average in 2008 after the House initially rejected the $700 billion bailout of major banks.

Since President Barack Obama’s re-election, nervous investors have sold stocks. The Standard & Poor’s 500 index sank 2.3 percent last week, its worst weekly drop since June. The sell-off resulted in part from anxiety over higher tax rates on investment gains once the fiscal cliff kicks in.

Obama has said he was open to compromise with Republican leaders. But the White House said he would veto any bill that would extend tax cuts on income of more than $250,000.

Republican House Speaker John Boehner has countered that higher tax rates on upper-income Americans would slow job growth. Boehner argued that any deal must reduce tax rates, eliminate special-interest loopholes and rein in government benefits.

The U.S. government has run annual budget deficits in excess of $1 trillion in each of the past four fiscal years. A recent report showed the government started the 2013 budget year with a $120 billion deficit in October, suggesting a fifth $1 trillion annual deficit is likely.

That adds pressure on Obama and Congress to reach a budget deal.

Still, most economists want an agreement that would lower the deficit gradually over several years, rather than a sharp cut that could rattle the still-weak economy.

More than 50 percent of the tax increases would come from the expiration of tax cuts approved in 2001 and 2003 and from additional tax cuts in a 2009 economic stimulus law.

The first set of tax cuts reduced rates on income, investment gains, dividends and estates. They also boosted tax credits for families with children. Deductions for married couples also rose. The 2009 measure increased tax credits for low-income earners and college students.

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 almost $20 a week, and a household with two high-paid workers as much as $4,500, or almost $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.

And it could catch many people by surprise.

“Every worker in America is going to see a reduction in their paycheck in the first pay period of 2013,” Vitner noted.

Another 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.

Mark Bakko, a Minneapolis accountant, said many mid-size companies he advises are holding off on equipment purchases or hiring until the fate of those tax breaks becomes clear. Bakko noted that the research and development credit typically lets a company that hired an engineer at a $100,000 salary cut its tax bill by $10,000. The credit routinely has been extended since the 1980s.

The rest of the tax increase mainly would come 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.

All this would lead many consumers to spend less. Anticipating reduced sales and profits, businesses likely would cut jobs. Others would delay hiring.

Another part of the cliff is a package of across-the-board spending cuts to defense and domestic programs, cuts the CBO says would total about $85 billion. Congress and the Obama administration agreed last year that these cuts would kick in if a congressional panel couldn’t agree on a deficit-reduction plan. The magnitude of the cuts was intended to force agreement. It didn’t.

Defense spending would shrink 10 percent. Defense Secretary Leon Panetta has said those cuts would cause temporary job losses among civilian Pentagon employees and major defense contractors. Spending on weapons programs would be cut.

For domestic programs, such as highway spending, aid to state and local governments and health research, spending would drop about 8 percent. Education grants to states and localities; the FBI and other law enforcement; environmental protection; and air traffic controllers, among others, also be would affected, the White House said.

Hospitals and doctors’ offices also could cut jobs if an $11 billion cut in Medicare payments isn’t reversed.

Extended unemployment benefits for about 2 million people would end. The extra benefits provide as much as 73 weeks of aid.

“It would be nice,” said Donald Marron, the Tax Policy Center’s director, “if we could … address these issues before the very last moment.”

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

5 comments

  1. Go off the cliff. The democrats are the party of corrupt and wasteful spending and blame everyone but themselves for this fiasco. The financial crisis was caused by Bill Clinton and his democrat friends, Chris Dodd and Barney Frank by allowing their bogus, Affordable housing initiatives (giving home loans to those without the means to pay for them). Obama and his ignorant democrat supporters need to feel the pain instead of blaming everyone, including George W. Bush.

  2. Yeah, just dem’s right? This black eye was caused by both and your ignorance is part of the reason a fix cannot be reached. Both parties need to rise out of their bunkers and reach across the aisle and stop worrying about their poticial ties and do what’s right for the nation.

    Carreer politicians are simply that. They worry about what’s best for them rather than the common good. Politicians should have to reap what they sow.

  3. Hey Dale, if you want to talk about corrupt and wasteful spending, the Iraq War is Exhibit A!

  4. To “Dale is clueless” …

    Dale is right-on regarding the corruption and wasteful spending of the current Washington administration. The Dodd/Frank Affordable housing initiatives were mindless, irresponsible mis-management of the taxpayer’s funds to buy votes for the party. As JS states, there is certainly blame to go toward the conservatives as well.

    Regarding the Iraq War as it relates to our national security, the Iraqi’s are very much implicated in the 9/11 aftermath and our War with them was justified. History will eventually bare out this truth.

    Is the military guilty of wastful spending? – certainly. It is a government operation with 40%+ administrative overhead cost just like the rest with all other government agencies which are collectively a very poor investment in tax payer’s dollars. However, at least our troops have brought positive results in keeping the Alkida/ Taliban muslims in check on their soil and not ours. Now if only the bumbling State Department would get out of the way and allow our troops to complete their mission unimpeded, we could re-establish stability in the Middle East region …

  5. If we presume that economic stability and growth are tied to tax policy, which may be a stretch, but let’s go ahead and presume that the politicians are correct about this. If so, then empirical evidence indicates that taxation should be based upon wherewithall to pay, hence the wealthiest Americans must pay a higher percentage of tax on their earned income than the poorest.

    I am open to suggestions to the contrary, but if you look at times when taxes were lowered on the middle class, and increased on the wealthy (i.e., under Bill Clinton (and shortly thereafter), under FDR (and shortly thereafter), and under Reagan (and shortly thereafter—yes, he raised taxes), then you clearly see a trend with economic growth being tied to the wealthiest Americans paying a fair share of the taxes.

    The Bush tax cuts, quite clearly, have not affected the economy positively in their more than a decade of existence. Being unwilling to consider that a balanced approach to increasing tax revenues, and finding cost savings, is ridiculous.

    Being stubborn for the sake of looking like a republican, rather than cooperating/compromising for the sake of acting like a discerning public servant with the nation’s best interests and economic prosperity—is the antithesis of serving the public. Allowing cuts, like the ones that will occur in transportation, to occur, all for the sake of protecting a failed economic policy, is selfish stupidity.

    The tactics implored by congressional republicans smack of that one time, long long ago, when a Wisconsin Governor allowed $800 million in federal funds to go to another state, rather than to local firms, local employees, and local infrastructure, which would have resulted in Wisconsin payroll and income taxes as well.

    The point is, congressional republicans, and dare I say most republicans, appear to have left their once-apparent ideal of pragmatism, and are today, instead, little more than idealistic, selfish, and unwilling to accept that they might not always be right.

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