What Will Be Consequences of 'Going Over the Cliff'?

Lawmakers and President Barack Obama are hurrying back to Washington on Thursday in what appears to be another attempt to avoid going off the fiscal cliff. In order to do that, Congress and the White House must agree on how to handle expiring tax provisions and across-the-board spending cuts, among other short-term issues that will impact the federal budget.

According to a recent Gallup poll, roughly half of the country is skeptical that a deal will happen before the January 1 deadline. Democrats continue to argue that allowing tax rates to expire on families making $250,000 combined and individuals making $200,000 or more will improve the economy. Republicans, however, want taxes to remain at current rates and focus more on entitlement spending cuts.

If no deal is reached, taxes will pop $2,400 for families making, on average, incomes of $50,000 to $75,000 and a CBO report says the country could lose up to 3.4 million jobs.

According to the Congressional Research Service (CRS), here are specific tax measures that will begin or expire--as well as spending cuts that will go into effect under the 2012 Budget Control Act.

Obamacare Tax Hikes

At the start of 2013, if an American does not purchase health insurance, a penalty/tax will be imposed on that individual. Also, some employers who do not provide affordable or adequate coverage to their staffs will be hit with a financial penalty.

The law includes a number of specific revenue provisions to pay for expanded coverage. For example, CRS cites a 0.9 % tax on individuals earning over $200k ($250k joint filers) through a Medicare payroll tax, tax on unearned (investment) income, and a medical device tax.

According to CRS

One-third of those revenues will be derived from taxes and fees on health insurers, plan administrators, and employers, with initial effective dates varying from 2011 up to 2018. However, nearly half of those revenues are to be derived from taxes on high-income taxpayers that will be effective in 2013, the same year in which the Bush Tax cuts expire. These include a Medicare payroll tax and a tax on unearned income. According to CBO, these two taxes are projected to raise $18 billion in revenue in 2013.

The Estate Tax (EGTRRA):

By allowing the estate tax to lapse in 2010, Americans who wanted to pass along their assets to family members were able to do so without the government taxing those assets. However, the estate tax, also known as the “death tax,” was reinstated in 2011 at a top rate of 35 percent. The previous top rate was 45 percent in 2009, before the estate tax lapsed one year later. President Obama wants the top rate at 45 percent as does the majority of his own party. According to CRS, “Absent legislative action, after 2012 the estate tax will return to pre-EGGTRA rules, with a top rate of 55% and a $1 million exemption.”

The "Doc Fix" (SGR)

The failure to override the Sustainable Growth Rate (SGR), otherwise known as the "doc fix," means doctor fees would severely lessened beginning in 2013. The SGR, essentially, is a formula to figure out how much Medicare providers are paid by intertwining their salaries into the country’s overall economic growth. 

Unfortunately, this formula has proven shoddy, as for years it had continued to fall short of what doctors should actually be paid for their services. Doctors who still accept Medicare patients would see their salaries reduced by 27 percent if no permanent fix is enacted. According to the Washington Post, that permanent “fix” could cost about $245 billion.

The Alternative Minimum Tax (AMT) Patch:

CRS says that when the AMT was established, the exemption amounts were not indexed for inflation, so if legislation does not happen before January 2013, about 27 million additional taxpayers will be subjected to it. Ironically, the AMT was created to ensure that wealthy individuals would pay some kind of income tax, not middle-income households. Forbes Magazine explains:

Believe it or not, tax collectors were even more disliked back then than they are now. It happens that I’m feeling sorry for our tax collectors right now and if I am not careful I’ll start feeling sorry for myself. Among the many items caught in the current gridlock is an AMT patch. The AMT (alternative minimum tax) was originally designed to make sure that very wealthy people paid at least some income tax. Even that motivation, while having emotional logic, was kind of dumb. Congress chooses to encourage various activities like historic preservation and affordable housing by creating tax incentives. Assuming for the sake of argument that those type of incentives are a good idea, why should it matter that some people embrace them so enthusiastically that they wipe out their entire tax?

The AMT kicks in at a certain threshold, which has not been permanently indexed for inflation. There is a budget logic as to why this has never been done. Instead Congress has “patched” the AMT on a regular basis. The IRS has come to count on them doing this. If they don’t get around to it, the IRS will have to reprogram their computers, which will delay the start of tax season. The Commissioner has given Congress a heads up on what an ugly tax season is shaping up at the moment.

Capital Gains

The Tax Foundation explained in late November that if the country goes over the fiscal cliff, the maximum tax rate on capital gains would be raised from “15 percent to 20 percent for the top four income tax brackets and from 0 percent to 10 percent in the 15 percent income tax bracket.”

Additionally, “qualified dividends, which are treated like capital gains in 2012, would be reverted to being taxed as ordinary income, with a top rate of 39.6 percent.”

Unemployment Insurance

States will have to start picking up the tab. Unemployment insurance will revert from being temporarily 100 percent federally funded to 50 percent federally funded. The other half will be funded up by the states.

Unless federal lawmakers enact an extension on unemployment insurance before the beginning of the year, the federal government benefit will end for those who have exhausted the usual 47 weeks. CNN reports "40% of the roughly 12 million people currently unemployed have been jobless for more than six months, according to NELP." 

States have their own unemployment insurance at varying lengths, depending on the state. However, as The Las Vegas Sun has reported, the states themselves can barely afford to shell out that benefit:

Nevada benefits are calculated as up to 50 percent of the wages a jobless worker was earning at their last place of employment, with a maximum weekly benefit of $398. Nevada DETR Unemployment Program Deputy Administrator Kelly Karsh said that runs up a tab of about $9.5 million per week. Despite the cost, “it’s a successful program, and it gets money flowing back into our economy,” Karsh said.

But it would be impossible for the state to make up the difference of lost benefits if the federal government stops footing the bill for its portion. The cost of any emergency unemployment benefits beyond the first 26 weeks is entirely carried by the federal government. Even if Nevada wanted to expand its unemployment coverage, it would be hard-pressed to come up with the funds: Nevada is still paying off a massive debt owed the federal government for funds the state borrowed to cover its 26-week obligation to the unemployed during the worst of the recession. Once more than $800 million, in September 2013, that debt still will be a whopping $540 million.

Because the federal government covers the cost of emergency unemployment insurance, neither Nevada’s debt nor its unemployment payment obligations increase if the federal government fails to pass an extension of emergency benefits.

If Congress does enact an extension on benefits for the unemployed, it will be the tenth extension that Congress has put forth since 2007.


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