Summary: What is the fiscal cliff? What caused it? What decisions needed to be made? How could it have been avoided?

Fiscal Cliff

How do we make sure this doesn’t happen again?

What is the fiscal cliff?

The fiscal cliff is a combination of certain legislation expiring as of 12/31/12 and other legislation becoming effective 1/1/13.  It is a combination of federal tax increases and spending cuts which would negatively affect most Americans and more than likely cause another recession for our country. Any of the causes when viewed independently would not be monumental; it is the fact they are set to occur simultaneously.  Below are some of the major issues which contributed to the fiscal cliff scare:

Legislation due to expire 12/31/12

  • End of temporary payroll tax cuts (2%)
  • Extended unemployment benefits
  • Research and tax credit
  • Bush tax cuts (2001-2003)
    • Income tax rates would increase for all including the top income bracket which would increase from 35% to 39.6%
    • Increased rates on estate and capital gains taxes
    • Alternative Minimum Tax would apply to significantly more Americans (millions)

Legislation to become effective 1/1/13

  • Budget Control Act of 2011 – automatic spending cuts to cut $109 billion between 2013 and 2021 (half from defense and half non-defense)
  • Medicare payments to physicians will decrease by 30%
  • Healthcare Reform Act
  • Increased tax rate on high income earners

The debt ceiling will be reached early in 2013

A word collage with healthcare finance words such as "debt, default, and money." Do you know about the fiscal cliff and the Debt Ceiling?

Do you know about the fiscal cliff and the Debt Ceiling?

  • Reaching the debt ceiling in 2013
    •  In 2011 the debt ceiling fight caused a downgrade in rating by Standard and Poor
    • Which caused higher interest rates
    • Which caused an increase in the deficit
    • Which spurred legislation to reduce the deficit – spending cuts and tax hikes

Lawmakers had 3 choices:

  • Do nothing and allow legislation to expire and become effective as planned. This would assist in reducing the deficit but would negatively impact in one way or another almost all Americans.
  • Cancel some or all of the scheduled tax increases/spending cuts which would exponentially add to the national deficit
  • Find a compromise to address the budget issues while not so severely impacting the majority of Americans. Of course, this is the alternative which was chosen

What did the final compromise entail?

The compromise basically addresses more of the tax side than the spending side. Below are some of the provisions which were signed and passed:

  • Tax rates: Initial legislation called for a tax rate increase for those individuals earning over $250,000. The compromise was to increase

Fiscal Cliff Notes

tax rates for those individual earning over $400,000. Rates were also set for the income levels for families.

  • Estate tax: Initial legislation was set to increase from 35 percent to 55% in 2013. Instead, the compromise increases to 40% with the first $5 million worth of property exempt from being taxed
  • Capital gains tax: Initial legislation was set to increase the capital gains and dividend tax rates to 23.8% from 15%. The compromise is to increase the rate to 20%.
  • Alternative minimum tax: Initial legislation was set to increase the alternative minimum tax rate from 5% to 20%. The compromise is to have the alternative minimum tax tied to inflation so it becomes a non-issue. There will be an increase more than likely but it won’t jump to 20% in one year.
  • “Doc fix”: Medicare payments were scheduled to be cut by 27% initially. The compromise is to enact effective 1/1/14 which would delay for 1 year.
  •  Unemployment benefits: The Federal Emergency Unemployment Compensation program was set to expire as of 12/31/12. The program has been extended through the end of 2013.
  • Renewable energy credit:  The renewable energy credit was due to expire 12/31/12. The tax breaks are extended through the end of 2013.
  • Wind energy credit: The wind energy credit was due to expire 12/31/12. The tax breaks are extended through the end of 2013.
  •  “Milk cliff” avoided: Subsidies for milk through programs such as food stamps were expected to be cut as of 12/31/12. This would have caused the prices for dairy items to increase dramatically, perhaps up to $7.00-$8.00/gallon for milk. Parts of the bill were extended through September.
  • Congressional pay freeze:  A temporary salary freeze had been applied to federal employees and lawmakers. This freeze was extended through the end of 2013.
  • Could this fiscal cliff have been avoided? Absolutely.  All of these provisions have had expiration and effective dates set for quite some time. These deadlines didn’t spontaneously appear. The dates 12/31/12 and 1/1/13 were not added as new dates to the calendar.  So, why did it come down to the 11th hour to address the fiscal cliff? Is there anyone actually tracking all of these deadlines? How can this issue be avoided in the future? Do you think perhaps we should start looking now at what is scheduled to expire as of 12/31/13 and what is to go into effect 1/1/14?

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