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Don Roach: The Fiscal Cliff and Rhode Island

Wednesday, January 02, 2013

 

Unless you have lived under a rock for the last several months, you’ve read about the fiscal cliff. I’ve talked about it at length over the past several weeks as well. We’re now in 2013, and while Congress reached a deal, we haven’t completely avoided going over the cliff.

Hold onto your pocketbooks ladies, Uncle Sam is coming.

Here are some details on how we’ll be affected by the changes.

Goodbye Payroll Tax Cut

What everyone will feel is the expiration of the payroll tax cut. Back in 2011, Congress lowered the payroll tax from 6.2% down to 4.2%. As of December 31, the tax cut is gone, and the money will be used to help fund Social Security to the tune of about $120 billion annually. For you taking notes at home, this is an easy calculation for you to do with your gross income. If you make 50,000 a year this amounts to about $83 a month or $1,000 a year. Our political leaders have talked about not wanting to impact the middle class and helping the economy for years, but I’m left wondering why our Congressional leaders would allow this 2% hit to expire. Two percent probably doesn’t hurt income earners making a lot of money, but $1,000 to someone making $50,000 a year is probably very significant. It’s additional money that could be spent saving for college, that 55” tv, or perhaps an annual cable bill. I think the government is making an error if they believe that this won’t impact people. It will and it begins with your next paycheck.

Bush tax cuts become permanent

One big plus from the Senate deal is that the Bust tax cuts will become permanent. We have, essentially, two tax systems in the US, the ordinary income tax and the Alternative Minimum Tax (AMT), and in theory, we pay the higher of the two. For most middle class earners, the AMT became irrelevant with the Bush Tax cuts earlier this century. If those tax cuts expire, and they did as of December 31, the AMT comes back into play for middle class earners. Through the last decade, Bush and then Obama have been signing bills into law that exempts just about everyone from AMT except the highest of income earners. Without such an exemption its more likely we would all be paying under the AMT because many of the exemptions under the ordinary income tax such as miscellaneous itemized deductions are not allowed under the AMT. By making the Bush Tax cuts permanent we won’t have to worry every couple of years about our income tax bill suddenly increasing. The Senate bill does determine that those making above $400 thousand individually and $450 thousand as a married couple are not exempt from the AMT which is above the target that Obama has been talking about for years. Still, for the middle class we need the Bush tax cuts to become permanent and with the Senate bill that becomes a reality.

Deal moves us away from the cliff…for now

Even though the House passed the Senate bill, we’ll have at least two other ‘fiscal cliffs’ to deal within the next year. First, the Senate bill did not provide a longterm answer to some automatic cuts to defense and other spending that are to kick in January 1. Instead, they put in a stopgap for about three months. Defense in 20 percent of the budget and the cuts would take $500 billion dollars from defense over the next decade. Before you can say layoffs, just imagine the logistical nightmare stemming from a $500 billion dollar loss.

Second, we’ll need to increase our debt ceiling (again) because we just hit in on December 31st. The Senate bill didn’t address this issue – thanks Senators!! From what I’ve read, the Treasury Secretary has taken steps to keep the lights on through February 28th, but come March 1 the government will have to make decisions on what to pay and what not to pay.

2013 could be a devastating year for Rhode Island

All told, if Congress is not able to agree on what to do next and agree quite fast, the country and Rhode Island are set up to face effects so devastating it’s difficult to swallow. One thing we know is that while Congress tackles the fiscal cliff, it’s not addressing the farm bill which – if left unaddressed – will cause government subsidies to go back to their ’49 levels, yes 1949.

Obviously, the government subsidies were less then which would cause a spike in milk prices, to say the least. This and a host of other aspects of our economy will be affected by the lack of a response by Congress on this mess. Like I said, what we can foresee and what will actually happen are probably in two different time zones and we should all be, for lack of a better word, scared. And given how Democrats and Republicans in Congress have worked so well with one another (sarcasm), we need to be horrified.

If you remember anything from this piece, please remember what I started with – hold onto your pocketbooks, ladies it’s going to be a bumpy ride.

Don can be reached at don@donroach.org .

 

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