This month, decisions on expiring taxes and scheduled spending cuts (known as the fiscal cliff) will set over $7 trillion of the federal budget over the next ten years. Depending on the compromise, the budget could be put on a path to being balanced and the tax code could be more progressive. A poor compromise would gut important federal programs while the national debt continues to grow. Doing nothing would likely throw the country back into recession.
Senator Baucus will be one of the deal’s main negotiators, as the chairman of the Finance Committee, overseeing the U.S. tax code and most entitlement spending. I thought I’d spend a post on the main elements of the fiscal cliff, and how they affect Montana.
Here’s are the scheduled changes for January:
- Bush Tax Cuts for the Wealthy: Unless the Bush tax cuts are extended again, the top income tax rate will go up to 39.6% from 35%. Republicans label this as a job-killing tax increase, but a recent Congressional Budget Office study disproved that myth. According to the IRS, less than 9,000 Montanans benefit from these cuts, which are worth about $1 trillion over the next 10 years.
- Rest of the Bush Tax Cuts: Three-quarters of the Bush tax cuts are actually for the lower and middle classes. The 2001 & 2003 tax cuts also doubled the child tax credit, reduced the penalty for married couples, and lowered the tax rate paid by the poorest from 15 percent to 10 percent. These provisions are worth about $3 trillion over the next ten years. If they expire, nearly everyone will face a tax increase.
- Sequester. Unless Congress finds alternative cuts, both defense and non-defense spending will be cut by eight percent. Since Montana is so reliant on federal spending, these cuts will impact the state more than any other part of the fiscal cliff. The cuts are clumsily applied across the board, and every federal program is affected equally. This means fewer highway dollars, fewer staff in the Montana Social Security offices, and less federal money flowing to the cities and State agencies.
- Payroll Tax Cut Expiration – The payroll tax, which was temporarily lowered by 2 percent in 2009 to stimulate the economy, returns to normal in January. Thus, the average Montanan making $29,400 will pay an extra $11.30 in Social Security taxes every pay period. (The federal government has covered one-third of everyone’s Social Security payments for the last three years).
- “Normal” Expiring Taxes. Although they’re not technically part of the fiscal cliff, hundreds of other tax provisions that expire at the end of the year. Many of them would normally be extended, but their fate is caught up in the negotiations This includes the Wind Production Tax Credit, which helps finance the wind turbines being built across Montana. Other common one year extensions are the Medicare “doc fix” and the Alternative Minimum Tax, a tax on the wealthy which was never indexed for inflation and would hit middle-class households
Things Not Impacted:
- Social Security and Most of Medicare – Although these are the largest federal programs, they do not face the automatic budget cuts, nor do most low-income programs.
- War Spending – Even though the Pentagon is facing the same 8 percent cuts, all spending designated as “overseas contingency operations,” (mostly in Afghanistan, Pakistan, and Iraq) is protected at the current level.