Taxation, Spending, Debt Collide: Prepare to Hear More About the U.S. Fiscal Cliff

A Polk economist argues against tax increases that could be coming.


Published: Thursday, November 29, 2012 at 11:58 p.m.
Last Modified: Thursday, November 29, 2012 at 11:58 p.m.

LAKELAND | By now you've probably already heard the term "fiscal cliff." If you haven't, you will in the next few weeks. A lot.

"I know what a cliff is. I think fiscal means something to do with the end of the year. I guess falling off at year's end," said Becky Hutchinson, a 39-year-old Lakeland dental assistant.

Retiree Joy Symmes, 83, said she has heard of it.

"It sounds like a bad thing. It sounds like if our government doesn't do something, we'll be in trouble," the Lakeland resident said.

It's a little more complicated than that. Many Americans have been paying lower taxes for the last decade, probably without even knowing it. But the series of tax cuts and tax credits instituted by the Bush administration in 2001 expire this year.

Those include cuts to individual income taxes and the estate tax, as well as giving a bigger allowance in the child tax credit.

In 2010, when they were set to expire, the Obama administration opted to extend them for two years because the economy was still weak and many families were still struggling. A temporary Social Security tax break is also supposed to expire at the end of this year. It would go back to 6.2 percent from the current 4.2 percent.

The much-discussed threat of the fiscal cliff is that if Congress doesn't act by Dec. 31, the nation could be plunged back into another financial crisis as a result of the combination of tax increases, automatic spending cuts and new discussions about the U.S. debt ceiling.

In addition, about $1.2 trillion in spending cuts scheduled for the next 10 years are scheduled to start at the beginning of the year. Those were agreed upon by Congress last summer as a compromise to raising the U.S. debt ceiling.

Cuts could be made to the defense budget and to such government programs as Medicare, student loans and several others.

The White House estimates the looming potential tax increases could set a family of four making about $40,000 a year back about $2,200.

Gordon Kettle, an economist and professor at Polk State College, said tax hikes now would be bad news.

With an economy that's still reeling from the effects of a recession and growing at a slow pace of 2 percent a year, a drop in consumer spending — the backbone of the economy — could cripple the economy again, he said. Spending cuts on government programs would also hurt poor people, who depend on them the most.

Chris McCarty, director of the University of Florida's Bureau of Economic and Business Research, said if not patched, the Alternative Minimum Tax instituted in the late 1960s would be the most immediate and most crucial problem for American taxpayers.

Designed to ensure that upper-income earners pay a minimum tax regardless of deductions and exemptions, it wasn't indexed for inflation. Over time, it has hit income groups it wasn't meant to target, including some middle- class families making less than $75,000 a year.

About 4 million Americans pay the tax.

Without action from Congress, the number of people paying the Alternative Minimum Tax would increase to about 30 million next year. Employees could see its impact in 2012 tax refund checks and end up unexpectedly owing taxes, McCarty said.

"A lot of people are used to working with the paychecks they have. A lot of people will be unprepared for a much bigger tax bill where they have to reach into their savings to pay it," he said.

"I'm expecting that they're going to very soon come out with a patch for the AMT because that would be a disaster if they don't fix that one."

If Congress doesn't act, 7.6 million Floridians could see their taxes go up, according to White House figures. Nationwide, about 114 million middle class Americans would pay higher taxes. The non-partisan Congressional Budget Office estimates that if nothing is done, unemployment would increase to 9.1 percent by the end of next year.

Economists are mixed on what to expect in the next few weeks as lawmakers work to negotiate a solution.

"I think the most likely scenario is that we get some kind of temporary Bandaid," Kettle said. "Both sides are making conciliatory noises looking like they're likely to compromise."

But the nation might jump off the cliff, albeit temporarily, said Jim Farrell, a professor of economics at Florida Southern College's Barney Barnett School of Business & Free Enterprise.

"It's looking like they won't reach a decision by the end of the calendar year. That said, there is still some time to do something about it," he said.

Employees, he said, might see the effects of the increased taxes on their paychecks in January, which would spur politicians to reach an agreement soon afterward.

Obama administration officials have said they would like to continue the tax cuts for families making less than $250,000 a year, but Republicans have voiced opposition to a tax increase for higher-income families.

Earlier this week, both sides seemed to indicate a willingness to compromise, but that quickly changed as House Speaker John Boehner, R-Ohio, said no substantive progress had been made, The Wall Street Journal reported Thursday.

Lawmakers have until midnight Dec. 31 to come to an agreement.

"I think everyone would like to see a solution. I don't know if either party is ready to give up enough until the American population start to feel the pinch," Farrell said.

[ Elvina Nawaguna can be reached at Elvina.Nawaguna@theledger.com or 802-7515. ]

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