The "fiscal cliff" explained
Congress is coming back to town after a month-long election-related break and the most contentious issues of the last four years - jobs, taxes and the economy - are set to return as well-with a vengeance. Finding a solution to avoid the "fiscal cliff" - the scheduled tax increases and spending cuts set to go into effect in January - will be the top priority of congressional leaders and President Obama in the lame duck session that will likely go all the way to Christmas.
Lawmakers agree that the economy is slowly heading in the right direction, though they disagree over whether things could have been even better by now. The unemployment rate is finally under eight percent, home prices are going up and consumers feel confident enough to spend more money.
Those improvements, however, could be wiped out if Congress fails to reach an agreement on the "fiscal cliff." The non-partisan Congressional Budget Office warns that allowing current tax rates to expire and billions of dollars in looming spending cuts to go into effect could launch the economy back into recession early next year.
Despite the consequences, there has been little effort among Democrats and Republicans to sit down together to find an alternate path with both sides waiting to see if the 2012 elections would give them a stronger hand in negotiations before accepting any compromises.
With the elections doing nothing to change the balance of power in Washington, Congressional leaders and the president are quickly running out of time to reach an agreement on the tax and spending issues that have bitterly divided them for the past two years.
It will be seen if lawmakers can finally move beyond the gridlock that has characterized this Congress, and set a more productive tone for next year, as they work on the following issues that make up the "fiscal cliff" over the next fifty-three days.
Sequester
As part of a deal brokered between Mr. Obama and congressional Republicans to raise the debt ceiling over a year ago, they agreed to $1 trillion in spending cuts that would start to go into effect in January 2013. The massive cuts would be slashed equally from defense and non-defense programs over the next 10 years with only Social Security and Medicaid exempt. Medicare benefit cuts would be limited to 2 percent.
The idea, according to members and aides at the time, was to make the cuts so onerous that it would force appointed House and Senate members of a bipartisan "supercommittee" to find a more reasonable way to achieve the same amount of deficit reduction.
But the polarization and gridlock that's infected the current Congress seeped into the supercommittee's work as well. Their months of negotiations resulted in absolutely nothing unless you count more acrimony.
The defense cuts, according to the nonpartisan Congressional Budget Office (CBO), would have the biggest impact on the economy. They estimate that preventing defense cuts set for the next two years alone would save 40,000 jobs. Republicans also argue that the cuts would be disastrous to the nation's military, especially considering the country is still at war.
Overall, the White House lists more than 1,200 government programs that would be subject to the sequester. And they warn that the cuts will compromise the country's food safety since the number of food inspectors would go down, its ability to respond to natural disasters since FEMA would be subject to cuts and it responsibility to ensure airline safety since the FAA's budget would also shrink.
Bush Tax Rates
There is probably no issue that divides Republicans and Democrats like taxes. Republicans believe that lower taxes result in economic growth because Americans can use that money to start businesses and invest in the economy in ways that create jobs. Democrats largely believe that tax cuts for the wealthy are unfair, don't do much to improve the economy and just add to the deficit.
At the end of this year, numerous tax breaks are set to expire including tax breaks passed in 2001 and 2003 known as the "Bush tax cuts."
Mr. Obama and Senate Democrats want to allow the top two tax rates for families making over $250,000 a year to expire at the end of this year. If your family made over that amount of money, your tax rate would go from 33 percent to 36 percent, or 35 percent to 39.6 percent.
Late in his campaign for re-election, the president threatened to veto any bill that extended the current rates for the country's wealthiest two percent.
A recent report by the CBO found that allowing the top tax rates to expire for families making over $250,000 would have little impact on economic growth. But it found that the budget deficit, another threat to the economy, would go down by $42 billion.
If Congress fails to act by the end of the year to prevent the Bush Tax Cuts from going into effect, all tax rates would go up from the current 10, 15, 25, 28, 33 and 35 percent to 15, 28, 31, 36 and 39.6 percent.
House Speaker John Boehner, R-Ohio, has said that allowing tax rates to go up for anyone is "unacceptable." As part of fiscal cliff negotiations, Boehner would like to agree on a process for Congress to accomplish tax reform next year that would lower rates, but pay for that by closing tax loopholes. Republicans say that would bring down the deficit and lead to the greatest economic growth.
Expiring Tax Breaks
There are other tax breaks set to expire at the end of the year. If Congress fails to act, capital gains taxes would go up from 15 percent to 20 percent. The child tax credit would drop from $1,000 per child today to just $500. The estate tax would also go up from 35 to 55 percent.
Another tax issue that plagues Congress yearly is the Alternative Minimum Tax (AMT), a massive tax on families that take a large number of deductions. The AMT, which became law in the late 1960s, was meant to ensure that wealthy Americans pay taxes, but was never indexed for inflation so it hits middle-class families today.
Also, the payroll tax break is also set to expire. The tax break meant most workers paid two percent less in payroll taxes while the economy was still struggling to recover from the recession. Lawmakers on both sides of the aisle largely agree that this tax break was meant to be temporary and ought to expire.
Medicare Doc Fix
If the holidays are coming, doctors who treat Medicare patients must be about to see their current Medicare reimbursement rate go down. Physicians would see a 27 percent decrease in their reimbursement rates if Congress fails to act. The issue is a regular problem given its cost. Republicans and Democrats agree that the pay cut shouldn't happen, but they get hung up over how to pay for it.
Unemployment Insurance Benefits
Unless Congress acts, current unemployment benefits that allow the long-term unemployed to qualify for up to 99 weeks of benefits will expire at the end of the year. If Congress does not reach a solution to avoid the fiscal cliff, the unemployment rate would spike to 9.1 percent meaning the timing would be a challenge for unemployed Americans who need longer than the 26 weeks of benefits most states provide.
