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Curtain Falls on “Fiscal Cliff” Drama, or was it a Tragedy for Taxpayers?
What’s the sound of one hand clapping? That’s probably the way many taxpayers reacted after reading news that Congress completed action to avoid some of the worst tax policy-related parts of the “fiscal cliff.”
Is an underwhelmed reaction justified, though? Supporters of the deal would remind us, middle-class taxpayer relief that was enacted in 2001 and 2003 was made permanent, a “patch” protecting 30 million American families from the Alternative Minimum Tax was cemented into place, and a gaggle of “extenders” was renewed for several years.
There were also a couple of nice surprises. Perhaps sensing their failure to provide leadership on reducing the national debt, lawmakers decided to keep their salaries frozen at $174,000 for the rest of the New Year, instead of accepting an automatic pay bump. Furthermore, the new law officially repealed a particularly repugnant feature of the 2010 health care law: the Community Living Assistance Services and Supports (CLASS) Act, a benefit program cynically designed to collect premiums as a spending offset in its early years while shifting costs beyond ObamaCare’s “scoring window.” Although the Administration announced last year that it would not implement the CLASS Act owing to its problematic financial condition, the scheme remained on the books until now.
The rest of the story is not as pretty. Here are several consequences of the fiscal cliff deal that will likely leave taxpayers jeering rather than cheering:
1) A new tax-rate bubble. Joint filers making less than $450,000 a year who think they’re safe from any kind of income tax increase should take another look at a bad old feature that will come back to haunt them: limits on itemized deductions and the phase out of personal exemptions. These provisions, gradually repealed under the Bush-era tax laws, will now hit married households at the $300,000 level – creating a “bubble” under the new 39.6 percent bracket.
One side effect of the bubble may be burst expectations for charities. Wealthier individuals may reconsider whether giving large financial gifts to worthwhile causes is … well … worthwhile anymore. Since many of nonprofit groups receiving the donations perform social services more efficiently and effectively than government agencies can, taxpayers at all income levels have cause for concern. Just as we opined in a December Issue Brief revaluating deductions and exemptions in the context of across-the-board tax reform is well and good; in the context of the fiscal cliff deal, however, lawmakers simply saw a $150 billion revenue-raising opportunity and took it.
2) A new 20 percent capital gains tax rate – or is it more? When President Obama kept stating on the campaign trail that he favored a top capital gains tax rate of no more than 20 percent, he was less than clear about whether or not this includes the 3.8 percent surtax on “unearned income” (whatever that is) that’s being triggered this year by the 2010 health care law. Now we know – the actual top rate will be 23.8 percent. Even worse, because the income thresholds are not synched, there could be capital gains rates of 0, 15, 18.8, 20, or 23.8 percent, depending on an individual's situation. There will be other permutations with the upper income tax rates depending on how one is affected by the deduction and personal exemption phase outs. Which leads us to …
3) More complexity. Those who believe 2012’s tax returns are complicated enough had better hold on to their hats for the next filing season. High-income earners will have to perform many additional calculations for phase-outs and clawbacks. Additionally, the already difficult to decipher maze of middle-class credits remains largely untouched, and won’t improve unless Congress tackles fundamental tax reform. According to NTU’s most recent "Taxing Trend" study, Americans spent $228.4 billion just complying with the personal and corporate income tax system. Freeing up even part of this “deadweight loss” could help steer private-sector resources to more productive activities.
4) Other Obamacare tax hikes. Another provision with serious middle-class implications is the “haircut” on the tax deduction for medical expenses that will require taxpayers to prove a higher threshold of health care costs before claiming a write-off (10 percent of Adjusted Gross Income versus the previous 7.5 percent). Although this year seniors can keep taking the deduction at the less stringent 7.5 percent level, by 2016 they too will be subject to the new rules. In Tax Year 2010, 98.8 percent of the 10.4 million filers who wrote off medical expenses on their 1040 forms had incomes of under $200,000. Meanwhile, medical device manufacturers are planning to cope with a new excise tax by – no surprise – shrinking operations and jobs.
5) The end of payroll tax relief. The so-called “payroll tax holiday” was controversial for some fiscal conservatives, who argued that it would have few of the economic benefits that reductions in income or investment tax rates would have. Nonetheless, the holiday did provide a 2 percent boost for tens of millions of paychecks. Conversely, 2013 will begin with a 2 percent pay cut for all of these households.
6) Hidden spending. The Joint Committee on Taxation’s estimated revenue effects for the fiscal cliff package include some eye-opening (more like eye-popping) numbers for the impact that some proposals will have on future budgets. A case in point: refundable credits, which allow individuals to claim money in excess of their actual tax liabilities. Though many of these sound like pure tax provisions, they are actually spending items. For example, extensions for three separate categories of law affecting the “Earned Income Tax Credit” will equate to $36.3 billion in spending over the next ten years. The refundable portion of the child tax credit from Bush-era policies, plus the relaxed income thresholds for refundability under the Obama stimulus, add up to $184.7 billion over that same period. Again, these monies represent expenditures, not foregone revenues.
7) Farm program extensions. Congress may have averted a disaster by opting not to pour mammoth, near-trillion-dollar legislation authorizing new agriculture programs into the fiscal cliff package, but the one-year extension of current farm programs doesn’t do taxpayers or consumers many favors either.
One example of the dilemma Americans faced was with dairy policy. In reaction to Agriculture Secretary Vilsack’s highly suspect warning that milk prices would shoot to $7 a gallon unless the existing Byzantine milk pricing system was renewed, Congress renewed through the end of 2013 the Milk Income Loss Contract (MILC) program along with other dairy price support rules. That’s perhaps not as odious as the Dairy Market Stabilization Program (DMSP) proposed in the 2012 Farm Bill, but a far cry from a much better plan offered by Reps. Goodlatte (R-VA) and Scott (D-GA) last year that would have provided “margin insurance” for dairy farmers without a market-manipulating supply and demand control regime.
8) Tax favors for special interests. At the same time Congress voted to raise taxes on small businesses (Ernst and Young have pegged the job losses associated with the President’s tax hikes at 700,000), lawmakers also extended tax credits for everything from wind power to cellulosic biofuel to NASCAR. While not a direct, taxpayer-funded subsidy, using the tax code to prop-up pet projects distorts the marketplace and displaces what are often more economical, privately funded enterprises. Congress should be working to eliminate these breaks in the context of fundamental tax reform that offers lower rates and a simplified base. Instead, it opted to continue to use the tax code to pick winners and losers.
9) No entitlement reform. If Washington ever wants to get serious about cutting the deficit, the first item on the list has to be entitlements; the three giants, Medicare, Medicaid, and Social Security are the real drivers behind our debt. Opponents of entitlement reform conjure pictures of grandma eating cat food at the first hint of reform, but there are many commonsense proposals that would increase the longevity of the programs while at the same time reducing the taxpayer burden. Reining in fraud and waste, increasing the eligibility age, encouraging private insurers in the senior market, and block-granting Medicaid to the states are all good places to start. Instead of deriding such suggestions as cruel and reprehensible, legislators from both sides of the aisle need to face facts -- we have an aging population, a struggling economy, and a serious debt problem with no money in the bank --and sit down for a serious discussion.
At the very least, Congress could have offset, with appropriate cuts elsewhere, the so-called “Doc Fix” for Medicare’s physician reimbursement rates. But once again elected officials resorted to their irresponsible behavior of undoing scheduled spending reductions and replacing them with nothing.
10) Sequester delay. Instead of having $109 billion in spending restraint take place immediately in the new year, Congress gave itself a two month reprieve, until March 1 to think of new reasons why there should be no end in sight for out-of-control spending. In November, 22 organizations joined with NTU to urge Congress not to delay or otherwise avoid the sequester because:
“Delaying this action will only make it harder to get our fiscal house in order, in the process weakening our economy, saddling future generations with debt, and further undermining Congress’s credibility to lead.”
Delaying the sequester was an important indicator of just how unwilling Washington is to tackle our biggest problem: spending. Despite the new revenues entrenched in H.R. 8, the CBO reports the “fiscal cliff” deal will add nearly $4 trillion to the deficit, confirming fiscal conservatives’ fears that higher taxes will do nothing to defray our sky-high debt.
Altogether, this deal was less a turnaround from the cliff than it was a swerve. And now, on to the spending side of canyon … will Congress keep putting its foot down on the gas or truly change direction by easing up on the budget accelerator?3 Comments | Post a Comment | Sign up for NTU Action Alerts
Speaking of Taxpayers (AUDIO): Tea Party Activist Greg Fettig
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In case you missed it over the holiday break, here is our "Speaking of Taxpayers" interview with Tea Party Activist Greg Fettig. It was a great discussion on Greg's trip from a citizen to activist. Check it out, and learn more about how you can defend taxpayers.1 Comments | Post a Comment | Sign up for NTU Action Alerts
It’s not too late for the House, Senate, and White House to come to an agreement that could spare taxpayers and our already fragile economy from the coming “fiscal cliff.” Below are four real world solutions that take into account the dire fiscal challenges we face. If you haven’t done so already, read Fiscal Cliff Part 1 for context.
1) Congress ought to make all the 2001 and 2003 taxpayer relief laws permanent, but if there’s no stomach for this fight, they can agree to cement all the lower- and middle-bracket tax policies while putting the others on a three-year extension (to get past the politicking of the mid-term elections). This would give more time for taxpayer advocates to demonstrate why it’s important to preserve existing rates for entrepreneurs too. Or, get ambitious and put the entire tax system on a sunset timetable, à la the Tax Code Termination Act. This would incentivize Congress to pursue sweeping tax-law changes by setting a more all-encompassing deadline and structured process.
2) Need to raise revenues? Do it in smart ways. The White House has already proposed selling off surplus federal real property. Get more aggressive about asset sales – from buildings to government-owned airwaves – and get not only money from the auctions but also long-term receipts from the taxpaying entities that will productively develop those assets. In a similar vein, royalties from activities such as oil and gas development could pour in if Washington would loosen its stranglehold on responsible exploration. Tax reform itself could be a revenue-raiser without adding to anyone’s tax burden, and not just from economic growth: there would be a boon from simply freeing up part of the $228 billion Americans spend complying with the current mess of a Tax Code.
Think all of this is impractical? They are more plausible for taxpayers than President Obama’s notion that raising capital gains tax rates will massively swell the Treasury’s coffers. President Reagan found this out the hard way when he signed into law an effective capital gains rate hike in 1986, and collections slowed. Bill Clinton, who signed a rate reduction in 1997, benefitted from a revenue boom.
Some would argue these strategies would raise only paltry amounts of money, but consider the alternative. According to the Congressional Budget Office’s "extended baseline scenario" under which ALL current tax relief provisions would expire – including middle-class rate reductions and the Alternative Minimum Tax “patch” – federal revenues would reach 21.4 percent of our Gross Domestic Product ten years from now. Spending would still beat that figure, at 22.3 percent, and that projection assumes cuts Congress has traditionally avoided – such as lower Medicare reimbursements to doctors – would magically take place. Which brings us to the next point …
3) The House’s spending-restraint package that passed on December 20 was chock-full of good ideas, but was offered in service to a not-so-good idea: that military spending should be off the table and domestic “discretionary” spending could take less of a nick too. Granted, the sequester mechanism’s approach to slowing expenditures was not particularly surgical, but that doesn’t mean policymakers should exit the operating room with a sick patient on the table.
NTU has partnered with groups from all across the political spectrum to identify hundreds of billions in low-priority Pentagon programs that could be downsized without compromising national security. Combine ideas such as these with the package the House passed, and we just might have a recipe that both parties could swallow (albeit reluctantly).
4) It’s long past time to take an honest, hard look at entitlements rather than a passing glance. Thanks to the closed-door nature of negotiations between Congress and the President, we have only an inkling of what negotiators consider to be “bold” reforms – such as shaving the cost-of-living adjustment formula or tinkering with the retirement age. Given the decades of dithering that have made Social Security and Medicare’s (not to mention Medicaid’s) conditions far less tenable, we prefer other definitions of “bold” – means-testing for future Social Security beneficiaries, real adjustments to benefit formulas such as wage indices, and policies to allow more individual saving and retirement. Here again bipartisanship, while difficult, is not impossible. The similarities Congressman Paul Ryan (R-WI) and Senator Ron Wyden (D-OR) shared on a premium-support-based Medicare reform plan show us one path. The partial accord between Ryan and Wyden seemed to have been put on ice during the campaign season, but if our public officials are truly interested in putting election-year differences aside here is one place to start.
So is Plan B’s demise a victory for taxpayers, or have we just moved closer to the point where our fate is to get punched harder and fall to the canvas? For NTU’s part, we plan on going the distance – and beyond. Whether taxpayers win in the final round or get hit with a split decision, there will be many more matches to fight in 2013.1 Comments | Post a Comment | Sign up for NTU Action Alerts
Hip, hip … well, let’s hold the “hooray” for now.
In the latest round of the fiscal cliff slugfest between Congressional leaders and the President, the House approved an alternative package to the spending-restraint “sequester” triggered by the Budget Control Act of 2011. But Speaker John Boehner (R-OH) threw in the towel on his “Plan B” to address expiring tax provisions.
NTU weighed many factors in its stance toward Plan B, which had much to recommend it: making permanent the 2001 and 2003 taxpayer relief laws for all Americans with taxable incomes below $1 million, cementing the “patch” that protects millions of families from paying the dreaded Alternative Minimum Tax, maintaining parity for dividend and capital gains tax rates, and providing a 35 percent death tax rate with an indexed $5 million exemption. All told, it was far and away a better alternative to President Obama’s calamitous scheme to raise taxes on a much broader scale, boost rather than curb various categories of federal spending, and condemn future generations of Americans to trillions more in debt.
Still, Boehner’s plan did open the door to higher taxes on job creators who declare their business income on 1040 forms; how much further that door would have swung open as the package moved through negotiations is anyone’s guess. Plus, Plan B’s omission of budget and entitlement reforms raised questions about what would accompany it – questions to which taxpayers had partial answers at best.
NTU is not among those who believe that to get the best deal, we should be willing to fall off the fiscal cliff. But at the point where it was being brought to the House floor, taking a pass on Plan B was the best among two difficult choices. As NTU has been reminding Members of Congress, even at this late hour there’s still time to avoid all the adverse tax implications associated with the fiscal cliff, redirect attention to specific spending reductions, and more aggressively commit to entitlement as well as fundamental tax reform.
Are we punch-drunk? No, especially if leaders on both sides of Pennsylvania Avenue read up on the history of fiscal consolidations done the right way, recognize the economic dangers of high taxes, and realize that serious spending reductions are the most effective way to keep our nation’s financial standing in the world from slipping further.
Read “Fiscal Cliff Part 2: Real World Solutions” for practical ways our leaders can overcome the stumbling blocks, and the priorities taxpayers should keep fighting for in the weeks and months ahead.0 Comments | Post a Comment | Sign up for NTU Action Alerts
The Late Edition: December 17, 2012
President Obama and Speaker Boehner met in person this morning to discuss a possible compromise on the Fiscal Cliff.
Watch Pete Sepp on Fox Business discussing the consequences of the Fiscal Cliff.
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Subscribe to NTU's podcast "Speaking of Taxpayers" via iTunes HERE!
This week NTU released a letter signed by 186 (with late sign ups) economists warning Congress against "Fiscal Cliff" tax hikes. Signatory to the letter, and author of the new book "A Capitalist Manifesto", Dr. Gary Wolfram of Hillsdale College joins Pete & Doug to discuss both!
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The Late Edition: December 13, 2012
Today’s Taxpayer News!
Earlier today NTU’s Pete Sepp joined the Competitive Enterprise Institute and a collation of fiscally conservative groups in a press conference to urge Congress to let the Wind Production Tax Credit subsidy expire.
A review of the 5 news taxes associated with ObamaCare which will kick in on January 1st, costing taxpayers a whopping $1 trillion over the next ten years.0 Comments | Post a Comment | Sign up for NTU Action Alerts
The Late Edition: December 12, 2012
How much does your state rely on the federal government for subsistence? Check out this article from the Tax Foundation detailing federal aid to state budgets.
Those seeking to raise taxes often cite the billowing debt to support their calls for new revenue. However, according to new numbers from the minority side of the Senate Budget Committee, 75% of the tax revenue in the President’s Fiscal Cliff proposal would go to new spending, not to pay down the debt. See the chart below from the Weekly Standard using CBO and OMB data:
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The Late Edition: December 10, 2012
Last week Sen. Jim DeMint (R-S.C.) left Congress to join the Heritage Foundation. DeMint has earned straight “A” grades from NTU Rates Congress for his outstanding commitment to protecting taxpayers’ wallets since he was first elected Senator in 2005.
Without a deal on the Fiscal Cliff, many state budget officials are concerned about the ambiguous future of funding and calling for Congress to act.
President Obama attempted to sell his tax increases on upper-income earners in Michigan today, and still shows very little flexibility on yielding to GOP calls for spending cuts as part of any debt deal to avoid the Fiscal Cliff.0 Comments | Post a Comment | Sign up for NTU Action Alerts
The Late Edition: December 6, 2012
Today’s Taxpayer News!
Pete Sepp weighs in on Rep. Shelley Berkley’s roughly $37,000 per-year pension, compliments of taxpayers.
This article from Newsday has more details on the impact of Obama’s tax proposals and how they affect middle-income Americans.0 Comments | Post a Comment | Sign up for NTU Action Alerts