A recent USA Today poll revealed that about 25% of Americans know little to nothing about the sequester–the mandatory across-the-board budget cuts set to be instituted on March 1 (that’s next week by the way). This is alarming since these budget cuts could affect us on a daily basis and could make life pretty inconvenient. Probably because of this collective cluelessness, another Pew/USA Today poll revealed that if nothing is done to resolve the sequester issue, about half of Americans will put the blame on Congressional Republicans and about 30% will blame the Obama Administration. And so, the finger-pointing continues in yet another politican-created crisis.
How did we get ourselves into this mess?
The sequester resulted from the debt ceiling debacle in the summer of 2011. Congress was debating whether to raise the debt ceiling and had a deadline of August 1st to come up with an agreement along with a deficit reduction plan. A “supercommittee” of politicians from both parties worked together to figure out mutually beneficial tax increases and budget cuts. Not surprisingly, the committee failed to agree on final terms; what they did come up with was a plan to decide to plan to hopefully-maybe-fingers-crossed come up with some deficit reduction options sometime in the inter-galactic future.
This mandate was part of the Budget Control Act of 2011, and also included the sequestration language; that is, failure to agree on deficit-reducing legislation would automatically trigger the sequester, which are automatic cuts that would affect every discretionary area of the federal budget.
When the Budget Control Act was drafted, no one thought Congress would be so irresponsible as to allow these budget cuts to be triggered. But like the 2011 debt ceiling debacle that lasted over 6 months and culminated in deadline drama, and the recent fiscal cliff thriller that ended with “cliff”-hanging legislation on New Years Eve, it looks like Congress is going to ride this one out too.
How will the sequester affect government budgets & the economy?
The sequester calls for $1.2 trillion in deficit reducing budget cuts over ten years, about $85 billion in cuts for this year alone. All areas of discretionary government spending will be affected, including social services, defense, education and housing. The areas not affected by the sequester are funding Social Security, Medicare, Veterans Benefits, etc.
Economists and politicians fear that implementing the sequester will have negative effects on our economy. Some economists believe that these austerity measures would reduce economic growth by .5% –so that the US economy would grow at 1.5% annually instead of the 2% growth that was forecasted (already well below the healthy 3% minimum growth we’ve seen in past years). The cuts are also expected to increase the unemployment rate, expected to hover around 7.9% by end of 2013.
Recently, Erskine Bowles, former Clinton White House Chief of Staff and more recently, a co-author of a famous deficit reduction proposal that was commissioned by Obama but that went nowhere (the Bowles-Simpson deficit reduction plan), was quoted regarding the spending cuts from the sequester:
“They are dumb and they are stupid, stupid, stupid. They are inane. There’s no business in the country that makes cuts across the board. You go in there and you try to cut those things that have the least adverse effect on productivity.
“Second, they’re cutting those areas where we actually need to invest: education, infrastructure, research.
“And third, they don’t make any cuts in those things that are growing faster than the economy. And that’s stupid, stupid, stupid.”
What Do The Cuts Possibly Mean For Us?
While the cuts have not yet been instituted, it’s possible that government-funded programs, agencies, infrastructure initiatives, etc. will be curbed in the next few months. Here are some likely outcomes:
– Government and military civilian worker furloughs are likely.
– National parks, monuments, camp sites, forests, etc. could be closed or reduce hours of operation and services. Libraries may also reduce hours, services and close branches.
– Fewer teachers as well as cuts to education funding and grants; access to after-school and Head Start programs may be reduced or eliminated.
– Housing and mortgage assistance could be affected as cuts may affect HUD (that provides housing for lower-income Americans) and government-funded mortagage assistance programs.
– Less spending for research and programs for National Institutes of Health (NIH), Center for Disease Control (think West Nile, bird flu, etc), Food & Drug Administration (the return of cosmetic testing on kittens??? NO!), etc.
– Fewer government workers like the TSA (longer lines at airport security!!!), border control agents, immigration and drug enforcement agents, etc. IRS agents may also see reduced hours or cuts.
– Budget-slashing at the Justice Department could lead to fewer investigations of wrong-doing and more abusive practices slipping through the cracks. Budget cuts to other government-funded regulatory agencies like the SEC, FDIC, etc. could result in less oversight and possibly more abuses in the financial industry.
– The sequester could hurt Hurricane Sandy government-funded recovery efforts.
– Cuts to defense resulting in less training for deployment readiness, cuts to equipment and weapons maintenance, investment in weapons, etc.
– Major cuts to defense funding could result in decreased naval and Air Force operations.
The Sequester Squeeze
With a week left to go before the sequester kicks in, Congressional politicians have been busy doing what they do best: finger-pointing while on vacation. The Republicans have been putting the responsibility on the Obama Administration, calling it the “Obama sequester” (even though the vast majority of Republicans voted for the Budget Control Act and the sequester in 2011.) The Democrats have taken their turns at the blame-game, accusing the Republicans of dragging their feet and not caring whether the cuts kick in.
Either way, it looks like we’re in for a bit of austerity starting next week. If so, now might be a good time to check out a ton of library books you don’t plan on returning and fudging on your taxes. There may not be anyone on the other side to check up on you.
By now, everyone is pretty sick and tired of hearing about the fiscal cliff. The fiscal cliff has been discussed, dissected, analyzed, blogged about, and counted down. It seems every man, woman, toddler and goldfish knows about the fiscal cliff!
Fortunately, Congress finally got its act together and on New Years Day passed legislation that presumably kept the US from falling “off the cliff.” In other words, if nothing had been done to avoid the fiscal cliff, then on January 1, 2013, taxes would have increased for most Americans, many middle class incentives would have expired and several harsh mandatory budget cuts would have begun to take effect, basically cutting many social services Americans rely on.
Now before we go organize a parade to honor our magnanimous government leaders, let’s get realz. This fiscal cliff debate had been going on for years and was a major theme of this election. Everyone knew when the deadline was and what was at stake. By leaving any negotiations on a deal to the very end and then pushing legislation at the last second, our politicians acted like a bunch of high schoolers who had been cutting class all semester long, only to be pulled aside by the school counselor and warned that failure to pull a C- on the final would result in failing 12th grade and staying back a year. So for the last 2 weeks of school (or in the case of Congress, the last 2 days of the year!) the students pulled all-nighters and tried to prove how earnest and hard-working they were about passing chemistry.
So in my mind, there are no heroes in this deal. Although I do applaud Speaker Boehner and Congressman Paul Ryan for standing up for the Bill during the session AND following up by putting their vote where their mouth is.
But now that we’re here, on the other side of the cliff and no one drowned, there’s a brand-spanking-new piece of legislation to wade through. So let’s do this:
What’s in the Bill:
1. Extends low tax rates for most Americans
The Bill permanently extends the Bush tax cuts for most Americans. In other words, the low tax rates that we’ve all enjoyed since President Bush introduced and Congress passed in 2001, will continue to be in force permanently. Individuals who make less than $400,000 will be taxed at those rates (top ordinary income tax rate of 35%, 15% capital gains and dividend tax).
2. Raises taxes on the wealthy
For individuals who make $400,000 or more and families who make $450,000 or more, their taxes will go up. The Bush tax rates were not extended to these individuals and families and so their top tax rate is 39.6%, capital gains and dividends taxed at 20%. Please also note that beginning in 2013, there is an additional tax imposed on investment income thanks to the health care bill. For families who make $250,000 or more, they will have to pay an additional 3.8% tax on capital gains, ordinary income, dividends, royalties and interest on amounts above the $250,000 threshold. So for some unlucky (but wealthy) few–their ordinary income tax rate could be almost 44% and 23.8% tax on capital gains and dividend income.
3. Limits to deductions and personal exemptions are back
In addition, taxes get even more complicated for higher income Americans–even for those who make less than $400,000–because the legislation brings back 2 tax provisions that were frozen by the 2001 Bush legislation. The personal exemption provision (PEP) reduces or eliminates the benefit of the personal exemption for high income earners, and the Pease provision, which limits and greatly reduces the ability of high earners to make certain deductions. These provisions will apply to individuals who make $250,000 or more and families who earn $300,000 or more a year.
4. Sets estate tax and exemption
The bill also addresses and makes permanent the estate tax rate and estate tax exemption, another set of taxes that were in flux over the past 10-12 years because of their temporary status. The estate tax is the amount of tax that a decedent’s (dead person) estate must pay on the value of the assets of the decedent, minus the estate exemption. The new legislation permanently set the estate tax (as well as the gift and generation skipping transfer taxes) at 40% and thereafter adjusted for inflation. The estate exemption–or the amount of a decedent’s estate exempt from tax– remains at $5 million (for couples it is a cool $10 million). This means that for wealthy families, they can continue to shelter up to $5 million of the estate from tax and then pay a 40% tax on the remainder.
5. Extends middle class incentives
The bill also extends several middle class tax credits and incentives for education and families. It extends for 5 years the American Opportunity Tax Credit, the Child Tax Credit and the Earned Income Credit.
6. Extends the AMT patch
It also makes permanent the AMT patch (which is an alternative tax provisions intended to make sure that the wealthy pay their fair share in taxes but because it was never adjusted for inflation when it was created, it has slowly been creeping into the middle class). The legislation allows for the AMT to be adjusted for inflation going forward.
7. The legislation also extends unemployment benefits for workers who would have otherwise run out of benefits this year.
8. Many pro-business, renewable energy and “green” tax credits are also extended.
9. Payroll tax holiday
The Bill did NOT extend the payroll tax holiday. This was instituted two years ago by the Tax Bill of 2010 and basically gave a tax break to every working American. During normal tax years, every worker must pay 6.2% Social Security tax on income. The 2010 Tax Bill cut this tax by 2%, saving Americans about $10-20 in taxes per paycheck. The recent legislation did not extend this tax holiday so this year every worker is back to paying the full 6.2% of tax on up to $113,000 of their income, or an additional $2274 in taxes annually.
What’s NOT in the Bill:
The Bill did not cover any significant budget cuts, entitlement reform, any meaningful deficit reform or corporate tax reform. Many if not all of these issues will be addressed shortly, however, as Congress gets ready for its next major rumble when the government hits the debt ceiling in March. It’s very likely that the Republicans will demand concessions, spending cuts and changes to entitlement during the coming debt ceiling debate. The tension builds….