WTOP Guide: What is the ‘fiscal cliff’?

The \'\'fiscal cliff\'\' is the mandatory $1.2 trillion in budget cuts that the government will have to make over the next 10 years if no debt-reduction deal is reached in Congress. (AP)

Megan Cloherty, wtop.com

WASHINGTON – As concern grows over the implications of reaching a “fiscal cliff,” WTOP offers a breakdown of the questions surrounding the government deadline and what it means for our region.

What is the “fiscal cliff”?

The “fiscal cliff” is the mandatory $1.2 trillion in budget cuts that the government will have to make over the next 10 years if no debt-reduction deal is reached in Congress.

The U.S. will go over the “cliff” and pass the deadline on Jan. 2, 2013. If that happens, the Budget Control Act requires automatic spending cuts to take effect. That means the U.S. will have to cut $100 billion out of the spending budget every year for 10 years, according to the Tax Policy Center.

If the spending cuts go into effect, the economy will weaken and America’s Gross Domestic Product will contract at a rate that likely will throw the country back into a recession, according to the Congressional Budget Office.

Why will it increase my taxes?

If the deadline passes, almost every tax cut enacted since 2001 will expire. Referred to as the “Bush tax cuts,” if they are allowed to expire, middle-income homes will see an average tax increase of almost $2,000.

The Tax Policy Center says the average tax increase will amount to between $3,500 to $3,700 per household.

“Almost 90 percent of Americans would see their taxes rise if we topple off the cliff. For most households, the two biggest increases would be the expiration of the temporary cut in Social Security taxes and the expiration of the 2001/2003 tax cuts,” says the Tax Policy Center.

Here is how the looming tax increases break down if American earners are put into five groups:

  • Taxpayers in the bottom 20 percent would see their taxes rise by 3.7 percent
  • Taxpayers in the 2nd “quintile” would see their taxes rise by 4.1 percent
  • Taxpayers in the middle “quintile” would see their taxes rise by 3.8 percent
  • Taxpayers in the 4th “quintile” would see their taxes rise by 4.2 percent
  • Taxpayers in the top 20 percent would see their taxes rise by 5.8 percent

Source: Tax Policy Center

For a detailed breakdown of the specific tax cuts that will expire, the Tax Foundation explains the 2001 and 2003 expiring tax cuts specifically.

How will this affect the Washington area?

If a “fiscal cliff” is reached, Metro will directly lose $12 million in funding and there will be a substantial loss in revenue without the fares of laid off federal workers no longer using the system, says Jim Dinegar, president of the Greater Washington Board of Trade.

“Their calculations have it north of $25 million, maybe up to $30 million a year in cuts to Metro,” Dinegar says. “That’s not a good proposition by any stretch.”

Thousands of layoff notices could be going out very soon to affected federal workers and those who work for defense contractors, Dinegar says.

It could also hurt the city’s recent economic boom, making it less attractive to businesses, Gray says. That translates into lost sales tax revenue, which he says could impact the city’s already tight budget.

It’s estimated Virginia, Maryland and D.C. together could lose more than 300,000 jobs if the mandatory cuts become a reality.

Which federal agencies and programs could be cut?

The Budget Control Act requires exactly $108 billion in automatic cuts each year through 2021, according to the White House.

On Sept. 14, 2012, the White House released a 394-page report detailing what will happen if the automatic tax cuts take place in January 2013, reports The New York Times.

About half the cuts will come from discretionary defense, 9.2 percent, and the other half, 8.2 percent, would be cut for non-defense programs, according to CNN.

The Department of Veterans Affairs and military personnel will be exempt from the budget cuts. The Department of Defense would see the biggest cuts, but the White House report says, the department would be able to shift funds so that military readiness would not be compromised.

Cuts in spending will affect government jobs and private sector jobs, especially among government contractors. Cuts also will affect programs and agencies in charge of air traffic control, food safety, homeland security, housing, food assistance and education, according to the White House report.

Cuts to programs mean layoffs which will then have a trickle-down effect. For example, if the dozen people who work for a federal contractor are laid off, their go-to lunch spot will likely face layoffs as well from the loss of business.

What is Congress arguing about?

The most contentious provisions between the parties in reaching a deal before the deadline are the expiring tax cuts for high-income households and the expiring 2009 tax credit expansions. Those tax credit expansions currently benefit low- income households, according to the Tax Policy Center.

Two days after the election, House Speaker John Boehner spoke to CBS News about the voters’ mandate to Congress to get things done, including reaching a deal to avoid the consequences of going off the “cliff.”

“We know what the best thing would be. It would be an agreement that sends the signal to our economy, and to the world, that after years of punting on the major fiscal challenges we face, 2013 is going to be different,” Boehner says.

“What we can do is avert the cliff in a manner that serves as a down payment on – and a catalyst for – major solutions, enacted in 2013, that begin to solve the problem.”

Boeher points to simplifying the tax code as a first step.

Senate Majority Leader Harry Reid also agreed that working together is the best remedy for the financial crisis hanging over the country. He told CBS News, in the same report, a compromise with Republicans is necessary to avoid the consequences of going over the “fiscal cliff.”

But neither party offered specifics as to how a deal will be reached in the lame duck session before the new year.

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(Copyright 2012 by WTOP. All Rights Reserved.)

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