WASHINGTON -- Now just weeks away, a crisis looms that might touch every paycheck in the land, and government services from the border to national parks.
President Barack Obama and a divided Congress are trying to avert a series of end-of-the-year spending cuts and tax increases that’s been dubbed the fiscal cliff. They still disagree on how to do that.
Failure would mean that $500 billion in tax increases take effect early next year, coupled with $109 billion in spending reductions, the first installment toward $1.2 trillion in cuts over two years. The nonpartisan Congressional Budget Office has said that might raise the unemployment rate to 9 percent or higher and push us back into a recession.
What is the fiscal cliff? How did we get to the edge? And what does it mean for Americans if the government goes over it?
Here are some answers.
The failure of Congress to reach a bipartisan deal last year to reduce projected budget deficits led to today’s predicament.
Congress agreed that if a 12-member committee failed to reduce projected deficits by $1.2 trillion over the next decade, spending would be cut automatically. The committee did fail, and the first round of automatic reductions is set to start in January.
Federal Reserve Chairman Ben Bernanke coined the term “fiscal cliff” in February testimony to Congress, where he warned that under current law “there’s going to be a massive fiscal cliff of large spending cuts and tax increases.”
Absent a deal, the 2011 law will cut nearly 10 percent of the nation’s defense and domestic spending. The cuts, known as sequestration, might lead to fewer FBI and Border Patrol agents, air traffic controllers and park rangers. Housing for low-income families would be cut, and medical research would suffer. New equipment and repairs for the military would be delayed.
The Indian Health Service faces a cut of $356 million, leading to less care for a Native American population that already has a life span that’s 5 years shorter than any other racial group’s in the United States. The National Science Foundation would be forced to reduce research and education grants by 1,600. Financial assistance provided by the Office of Federal Student Aid would fall by $140 million.
The list goes on and on: The agricultural disaster-relief fund, which was in the news during the brutal summer drought, stands to lose $104 million in funding. The Centers for Disease Control and Prevention would be cut by $464 million; the National Institutes of Health, $2.5 billion; the Transportation Security Administration, $429 million for airport security measures. The fund that doles out money to the families of Sept. 11 victims would shrink by $24 million.
Judge Julia S. Gibbons, of the 6th U.S. Circuit Court of Appeals in Tennessee, told Congress that the courts would have to downsize, implement furloughs, delay civil trials and lay off court security officers to cope with the cuts.
Most defense programs would be cut by 9.4 percent, while domestic programs would see an 8.2 percent reduction. Administration officials couldn’t say how many federal employees would lose their jobs, but they said the cuts would have a “significant impact on the federal workforce.”
Medicare benefits wouldn’t be touched. Nor would veterans’ benefits and food stamps, under the law. Medicare providers would take a 2 percent hit.
If the temporary George W. Bush-era tax cuts are allowed to expire, the income tax code would revert to tax brackets from 2000.
The current top rate of 35 percent would rise to one of two rates, either 36 percent or 39.6 percent. The 25 percent tax bracket would rise to 28 percent, while the 31 percent bracket would rise to 33 percent.
On the low end, the current bottom tax bracket of 10 percent would disappear, reverting to a 15 percent bracket.
A married couple without children who have taxable income of $57,462 would see their income taxes go up by $2,262, according to a tax calculator created by the Tax Policy Center, a nonpartisan research center. A couple with $106,059 in taxable income would pay $4,218 more to Uncle Sam, and couples earning $415,687 would pay an extra $20,841.
High-income taxpayers would see their personal exemptions phased out, and their itemized deductions subjected to more limits. For married couples filing jointly, the standard deduction on their 1040 tax forms would shrink in size relative to single filers.
Investors’ dividends would be taxed at the rate of ordinary income taxes, instead of the current 15 percent.
Capital gains would increase from 15 percent to 20 percent.
“The dividend tax increase alone is almost cataclysmic,” Kevin Hassett, an economist with the free-market research center the American Enterprise Institute, warned Congress on Thursday, saying it might spark a recession.
The child tax credit would be cut in half, to $500 per child under the age of 17. The child- and dependent-care credit, as well as the earned-income credit for poorer taxpayers, also would shrink.
Sometime later this month, the federal government is expected to bump up against the $16.3 trillion limit on outstanding federal debt, called the debt ceiling. The debt comes from spending already approved by Congress.
For the next two months, the Treasury Department can move money around to keep paying its creditors who bought Treasury bonds. Republicans insist they’ll pass a new debt ceiling, allowing the government to borrow to pay what it now owes, only if steep spending cuts are agreed on.
Absent a deal, there’d be debt default.
In August 2011, similar negotiations went to the wire and resulted in Standard & Poor’s downgrading the credit rating of the U.S. government. If its competitors Moody’s Investors Service and Fitch Ratings do the same early next year, it might disrupt financial markets. Many pension funds, endowments and other big institutional investors would, under their charters, have to divest of U.S. government bonds that aren’t AAA rated.
The payroll-tax holiday, first passed in 2010, reduced to 4.2 percent from 6.2 percent the percentage of worker’s pay, up to $110,100, that’s subject to the tax that helps finance Social Security and Medicare. In 2012 that translated into a $700 tax cut for a person who makes $35,000 a year and a $2,202 tax cut for workers who earn $110,100 or more. Ending the cut for 160 million American wage earners would translate into $95 billion in additional tax revenue for government coffers in 2013.
HEALTH CARE TAX
Under the Affordable Care Act – which some call Obamacare – a surtax of 3.8 percent will be tacked on to investment income for individual filers whose modified adjusted gross incomes exceed $200,000 – $250,000 for joint filers – starting Jan. 1.
ALTERNATIVE MINIMUM TAX
The alternative minimum tax is a parallel tax enacted in the 1960s to stop the wealthy from skirting taxes through deductions. It was never indexed to inflation, so income that was considered huge back then isn’t so huge today. Congress has “patched” the AMT repeatedly but it didn’t do that for 2012 income. If no bill is passed to patch it by Dec. 31, it might hit 31 million people when the April 15 tax-filing deadline arrives and taxes on 2012 income are due.
The estimated cost of a one-year patch is $85 billion. Taxpayers most at risk are couples filing jointly with two or more children, and whose income falls between $75,000 and $500,000, especially those with income above $200,000.
Doctors face cuts in Medicare payments as high as 27.4 percent.
For more than a decade, the Medicare system’s funding formula has failed to match its spending, regularly leaving Congress to choose between providing additional money or cutting reimbursement to physicians. Congress has opted for a patch dubbed the “doc fix,” providing additional money to ensure that doctors aren’t cut off and Medicare recipients don’t suffer. Last year’s one-year patch cost $19 billion.
Erika Bolstad, Michael Doyle and Rob Hotakainen contributed to this report.