As Congress returns to work this week for the first time since the election, its members face perhaps the most daunting calendar in memory. A series of tax breaks many Americans take for granted is set to expire at the end of December, just as billions of dollars of automatic cuts would slash domestic and defense spending.
Last Tuesday, Americans returned a divided government to Washington. What’s unclear is whether the two parties plan to work better together to solve this problem. Here’s what they’re facing:
What is this looming crisis facing Congress?
It’s been called “Taxmaggedon” and the fiscal cliff. It’s a one-two punch of expiring tax breaks and deep spending cuts that could sap the energy from an improving economy and drive the nation back into recession, according to the Congressional Budget Office.
“There’s never been this many things expiring at once, and the economic impact has never been so large,” said Marc Goldwein, senior policy director of the Committee for a Responsible Federal Budget.
The tax breaks — including some for the wealthy that President Barack Obama campaigned against extending — are set to expire Dec. 31. The automatic spending cuts were designed as a poison pill to encourage Republicans, loathe to cut defense, and Democrats, wedded to social programs, to reach an agreement to cut the deficit last year. But a bipartisan committee could not strike a deal to spare both parties’ sacred cows. Now the poison pill, known as sequester, is looming.
The across-the-board automatic cuts are “mindless,” Goldwein said. It would be like asking a family facing a huge cut in income to cut every category of their budget, from food to vacations, by the same percentage.
What tax breaks are at stake?
If Congress drives the country off the fiscal cliff, Americans will face an unprecedented tax increase in 2013. It totals $500 billion and includes the majority of tax breaks enacted since 2001, as well as some of the most popular in the tax code. A middle-income family would see a tax increase of about $2,000, according to report from the Tax Policy Center.
Among the taxes in play:
The child tax credit: Under President George W. Bush’s Tax Relief Reconciliation Act, the maximum value of the credit was doubled to $1,000 per child, said attorney Adi Rappoport of the Gunster firm in West Palm Beach. Two years ago, Congress extended the credit until the end of 2012 and allowed families whose income tax is lower than the credit’s value to receive more of the credit in a cash refund.
The alternative minimum tax: This tax seeks to ensure that people who have access to certain deductions and credits — usually the wealthy — pay at least a minimum amount of tax. Congress has repeatedly patched this tax, which does not take inflation into account, to ensure that it does not apply increasingly to middle-class families. If Congress does not address this tax, 26 million households will face an average tax increase of $3,700, according to the Chicago Sun-Times.
Estate taxes: In 2012, a couple can give a gift or the estate of a couple can bequeath up $10 million tax free. If the estate tax break expires, that limit will drop to $2 million and 10 times as many estates would be hit by the estate tax.
Bush tax cuts: They benefited virtually anyone who filed a tax return but were most generous dollar-for-dollar to higher-income earners. The top income tax rate was reduced to 35 percent from 39.6 and the bottom rate to 10 percent from 15.
Payroll tax cuts: About 120 million households would be subject to a 2 percentage point increase in the payroll tax .
Are there any other ugly realities associated with this deadline?
Unemployment benefits extended by Congress for the long-term out-of-work are also set to expire. A cut in payments to Medicare doctors would take effect if Congress does not act.
What are the cuts associated with the sequester?
In 2013, the national budget will take a hit of about $109 billion.
Sequester would cut $1.2 trillion, roughly split between defense and domestic spending, between 2013 and 2021. Entitlements like Social Security, Medicare and Medicaid are largely exempt from the cuts.
“There are lots of government service that people depend on that would be facing cuts here,” said Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and a former member of the Obama economic team. “People across the country depend on things like airport safety, investments in infrastructure and worker training, the FBI and Homeland Security and transportation and, of course, defense.”
What are the chances of Congress going over the cliff?
Slightly less than before the election. House Speaker John Boehner, Senate Majority Leader Harry Reid and President Barack Obama have each made comments about working together to reach a deal. Leaders are set to meet this week to start talks.
But Bernstein is not entirely optimistic: “You might think that we’ve achieved Kumbaya and Nirvana, but no.”
While Boehner, for instance, has talked about raising revenue by closing loopholes in the tax code, Bernstein said once you start talking about “how you get that revenue, they’re still miles apart.”
“We’re probably going to have to go over the cliff — hopefully temporarily — to resolve this,” he said.
Last Tuesday, Americans returned a divided government to Washington. What’s unclear is whether the two parties plan to work better together to solve this problem. Here’s what they’re facing:
What is this looming crisis facing Congress?
It’s been called “Taxmaggedon” and the fiscal cliff. It’s a one-two punch of expiring tax breaks and deep spending cuts that could sap the energy from an improving economy and drive the nation back into recession, according to the Congressional Budget Office.
“There’s never been this many things expiring at once, and the economic impact has never been so large,” said Marc Goldwein, senior policy director of the Committee for a Responsible Federal Budget.
The tax breaks — including some for the wealthy that President Barack Obama campaigned against extending — are set to expire Dec. 31. The automatic spending cuts were designed as a poison pill to encourage Republicans, loathe to cut defense, and Democrats, wedded to social programs, to reach an agreement to cut the deficit last year. But a bipartisan committee could not strike a deal to spare both parties’ sacred cows. Now the poison pill, known as sequester, is looming.
The across-the-board automatic cuts are “mindless,” Goldwein said. It would be like asking a family facing a huge cut in income to cut every category of their budget, from food to vacations, by the same percentage.
What tax breaks are at stake?
If Congress drives the country off the fiscal cliff, Americans will face an unprecedented tax increase in 2013. It totals $500 billion and includes the majority of tax breaks enacted since 2001, as well as some of the most popular in the tax code. A middle-income family would see a tax increase of about $2,000, according to report from the Tax Policy Center.
Among the taxes in play:
The child tax credit: Under President George W. Bush’s Tax Relief Reconciliation Act, the maximum value of the credit was doubled to $1,000 per child, said attorney Adi Rappoport of the Gunster firm in West Palm Beach. Two years ago, Congress extended the credit until the end of 2012 and allowed families whose income tax is lower than the credit’s value to receive more of the credit in a cash refund.
The alternative minimum tax: This tax seeks to ensure that people who have access to certain deductions and credits — usually the wealthy — pay at least a minimum amount of tax. Congress has repeatedly patched this tax, which does not take inflation into account, to ensure that it does not apply increasingly to middle-class families. If Congress does not address this tax, 26 million households will face an average tax increase of $3,700, according to the Chicago Sun-Times.
Estate taxes: In 2012, a couple can give a gift or the estate of a couple can bequeath up $10 million tax free. If the estate tax break expires, that limit will drop to $2 million and 10 times as many estates would be hit by the estate tax.
Bush tax cuts: They benefited virtually anyone who filed a tax return but were most generous dollar-for-dollar to higher-income earners. The top income tax rate was reduced to 35 percent from 39.6 and the bottom rate to 10 percent from 15.
Payroll tax cuts: About 120 million households would be subject to a 2 percentage point increase in the payroll tax .
Are there any other ugly realities associated with this deadline?
Unemployment benefits extended by Congress for the long-term out-of-work are also set to expire. A cut in payments to Medicare doctors would take effect if Congress does not act.
What are the cuts associated with the sequester?
In 2013, the national budget will take a hit of about $109 billion.
Sequester would cut $1.2 trillion, roughly split between defense and domestic spending, between 2013 and 2021. Entitlements like Social Security, Medicare and Medicaid are largely exempt from the cuts.
“There are lots of government service that people depend on that would be facing cuts here,” said Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and a former member of the Obama economic team. “People across the country depend on things like airport safety, investments in infrastructure and worker training, the FBI and Homeland Security and transportation and, of course, defense.”
What are the chances of Congress going over the cliff?
Slightly less than before the election. House Speaker John Boehner, Senate Majority Leader Harry Reid and President Barack Obama have each made comments about working together to reach a deal. Leaders are set to meet this week to start talks.
But Bernstein is not entirely optimistic: “You might think that we’ve achieved Kumbaya and Nirvana, but no.”
While Boehner, for instance, has talked about raising revenue by closing loopholes in the tax code, Bernstein said once you start talking about “how you get that revenue, they’re still miles apart.”
“We’re probably going to have to go over the cliff — hopefully temporarily — to resolve this,” he said.