News Column

Understanding the 'Fiscal Cliff'

December 6, 2012

David Anderson

Despite dealing with a struggling economy for four years, local residents and their counterparts around the nation have enjoyed historically low tax rates.

That could change, though, if members of Congress and President Barack Obama cannot reach an agreement before Dec. 31 to avoid a so-called "fiscal cliff," which would kick in with major tax increases coupled with large spending cuts.

The tax increases and spending cuts, which make up about 4 percent of the nation's Gross Domestic Product, are designed to lessen the federal budget deficit.

"We've been enjoying things, and this time we're going to have to take some harsh cough medicine so we don't leave a huge burden on our children," said Michael E. Spears, CRPC, a financial advisor with Ameriprise Financial of Kinston.

The impact would be felt around the country, including in Kinston and Lenoir County.

"If they don't cut a deal with this, everyone will be impacted," Spears said. "You'll probably see the economy go into recession (and) unemployment spike."

Several income tax breaks enacted years ago are scheduled to expire at the end of the year, including the cuts to individual income tax rates, the estate tax, capital gains and dividend tax rates and child taxes enacted under former President George W. Bush in 2001 and 2003, according to The Washington Post's Wonkblog.

The expansion of the Earned Income Tax Credit and American Opportunity Tax Credit to more taxpayers in 2009 as part of Obama's stimulus package will end as well, along with a 2 percent cut in employee payroll tax rates.

All together, the tax increases are worth $500 billion, according to Wonkblog, a Washington Post policy watch website.

Americans also face about $200 billion in spending cuts, which are required by the Budget Control Act of 2011, passed in the wake of last year's debt ceiling crisis which resulted in a downgrading of the U.S. credit rating, according to Wonkblog.

The sequestration includes a 2 percent cut in Medicare payments to health care providers, which Spears said could have a major impact in Kinston, where health care makes up a significant part of the local economy.

Wonkblog stated there will also be a cut "across the board" of 7.6 percent to 9.6 percent in federal "discretionary spending" in defense and non-defense programs.

U.S. Sen. Kay Hagan, D-N.C., said in a Wednesday conference call with North Carolina media --including The Free Press -- that such cuts in defense spending would have a disastrous effect on military installations and defense-related businesses in the Tar Heel State.

Hagan said North Carolina could lose 34,000 defense-related jobs by 2014; the state could also lose $8.3 million in biomedical research funding and millions more in education funding.

"We have a short time between now and the end of the year (to make a deal)," Hagan told reporters. "Personally, I remain optimistic that we can put the posturing behind us and enact a balanced deficit reduction plan."

U.S. Rep. Walter Jones, R-N.C., whose district includes sections of Lenoir County, laid out some of the president's proposals to avoid the fiscal cliff on his website, including $1.6 trillion in tax increases, $400 billion in cuts to entitlement programs and ending Congress' control over the federal debt limit.

Jones blasted those proposals as "token" and encouraged deeper cuts, such as closing the U.S. Department of Education, ending the war in Afghanistan and repealing Obama's health care reform plans.

"The president's proposal to permanently remove Congress's control over the debt limit is outrageous," Jones stated. "The administration should read the Constitution: Congress has the power of the purse, not the president."

Spears said if the tax cuts are extended, the majority of Americans would not see an impact -- people making more than $250,000 a year would, though, as Obama continues to push proposals to raise income taxes on high earners.

He noted the number of income tax brackets will shrink from six to five in 2013, and the highest tax rate will increase from 35 percent to 39.6 percent.

"Our debt-to-GDP ratio is getting into some scary turf," Spears said. "There are very few countries that have survived keeping a high debt-to-GDP ratio."

Kinston resident John Nix, co-owner of the Matrix East PLLC surveying firm, expected the effects of going over the fiscal cliff would be "devastating."

"Over half the people in the country are receiving some sort of taxpayer-subsidized benefits, and for us to have these kinds of cuts, especially the military, it's just going to be mind boggling in terms of job loss," he said.


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