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What to Make of the Fiscal Cliff Deal?

2:06 pm in Uncategorized by ThirdandState

By Sharon Ward, Third and State

Tell us what you think about the Fiscal Cliff deal. Take our two-question survey.

The agreement reached by President Obama and Congress on January 1 was both historic and disappointing — and it leaves much unsettled. The urgency of the Fiscal Cliff has dissipated, but significant threats remain to federal funding for state and local services as well as refundable tax credits for low-income working families, Medicaid, Medicare and Social Security.

There is much to dislike in this agreement. It makes permanent most of the Bush era tax cuts, ensuring that income from dividends and capital gains will be taxed at a lower rate than income from work. It makes permanent the estate tax but locks in a tax rate that creates a huge windfall for the top 0.3% of households. Sequestration cuts — the automatic spending cuts that members of both parties hated and the President said would not occur — have been postponed for two months, with three-quarters of FFY 2013 cuts ($85.6 billion) and $109 billion in annual cuts after that still in law through 2022. The President’s line in the sand on raising tax rates for the top 2% of earners got pushed way back, with top rates kicking in at $400,000 for an individual and $450,000 for a couple. A low-wage earner might need 20 years to make that much.

The agreement is at the same time extraordinary. Eighty-five Republican members of Congress voted with their Democratic counterparts to raise taxes on wealthy Americans — no small feat in a Congress defined (some might say dominated) by its Tea Party members, Grover Norquist, and fealty to the no-tax pledge. Even toward the end, the House of Representatives stood firm in its defense of tax cuts, failing to muster enough votes for Speaker John Boehner’s “Plan B,” which included significant spending cuts and limited tax hikes to millionaires and billionaires.

On the plus side, the agreement abandoned the plan for “chained CPI,” a new measure of inflation that would have reduced future cost-of-living increases for Social Security, veterans’ benefits and other critical benefits. There were no additional spending cuts. The family tax credit programs — including the Earned Income Tax Credit and Child Tax Credit — were protected, and improvements made to those credits were extended for five years. Emergency unemployment insurance benefits were extended for laid-off workers who would have faced a significant immediate threat if we went over the cliff.

So what happened? The framework for the debate has always been the same: a grand bargain that would achieve a deficit reduction target of $4 trillion through a combination of cuts and new revenue. 

The President took what could be considered a realistic path — pressing for tax cuts for the middle class and tax hikes for the top 2% who could most afford it (and have done the best over the past decade). He largely succeeded, and while that is a significant victory, it does not raise enough revenue to stabilize the nation’s debt. This will end up putting significant pressure on the spending side of the ledger.

Already much of the press on the agreement is calling for significant new cuts, without acknowledging the $1 trillion in cuts already agreed to in the Budget Control Act of 2011. Plus, the President has lost the leverage of the Fiscal Cliff deadline.

The next fight will take place over the next two months when Congress will have to act to raise the debt ceiling, probably in February. Sequestration cuts will be announced on March 1 and scheduled to begin on March 27, the date that the continuing resolution governing current year spending expires. 

The President acknowledged that the debate is not over in his January 2 press conference and made two strong statements; that the vote on the debt ceiling should not be tangled up in the larger deficit reduction plan, and that new spending cuts have to be matched one for one with new revenue. Still, few are optimistic that Congress will take a reasoned, balanced approach to resolve the remaining issues, as The New York Times notes:

In the weeks to come, Republicans will use not just the debt-ceiling threat, but also the $100 billion across-the-board cuts known as the sequester, delayed for two months in this week’s deal, and the potential shutdown of the government when the current spending resolution expires in March. Standing up to brinkmanship will require a level of resolve that the president has yet to fully demonstrate.

It is also unclear where new revenue will come from given the long-term agreement on the Bush tax cuts and the fact that the President has taken corporate tax reform off the table, arguing that loophole closures should be dedicated to corporate tax reduction. The easiest and most politically popular option, higher marginal tax rates on wealthy individuals, is done. The other options (capping the value of tax deductions for home sales or charitable contributions) will be harder to accomplish.  

So what’s at stake moving forward?

Sequestration cuts. The current plan locks in three-fourths of the cuts ($85.4 billion) plus another $4 billion in discretionary cuts in the current year (FFY2013). While there is some hope current year cuts will be reduced, it is more likely that the debate will center on knocking back the devastating sequestration cuts for 2014 and beyond.

Working family tax credits. One of the surprises of the debate was the targeting of the Child Tax Credit and Earned Income Tax Credit programs, which are refundable for very low-income working families. While the fiscal cliff agreement continues those programs for five years, including the improvements that specifically benefit low-income families, there is grave concern that their refundability may be in jeopardy.

Medicaid. The health care program was excluded from sequestration, but cuts are likely to be on the table. Since states jointly fund this program, reduced federal participation will just shift costs to states. On the plus side, Medicaid is key to the promise of coverage under the Affordable Care Act, so protecting Medicaid is likely to be a high priority for the administration.

Entitlements. Chained CPI might return, as well as cuts to Medicare and Social Security. 

Pressing for additional revenue will continue to be the key to avoiding new deep cuts to health care, education and other critical services. While the Fiscal Cliff no longer looms, the Debt Ceiling Cliff is just over the horizon.

Few in PA Would Be Affected by Ending High-income Tax Cuts

8:08 am in Uncategorized by ThirdandState

By Sharon Ward, Third and State

The Pennsylvania Budget and Policy Center is out today with a new analysis finding that President Obama’s plan to end federal tax cuts for high-income earners would have very little impact on taxpayers in most Pennsylvania counties.

In over half of the state’s 67 counties, fewer than 1 in 100 residents (that’s 1%) would pay the higher marginal tax rate on income above $200,000 for individuals and $250,000 for married couples.

In most counties, only a small number of individuals are affected. In 24 counties, fewer than 200 high-income earners would pay the higher rate. Almost two-thirds of the top earners who would be impacted reside in just six Pennsylvania counties.

Map 1. Percentage of Taxpayers in Each PA County with Incomes Over $250,000

Map 2. Number of Taxpayers in Each PA County with Incomes Over $250,000

Under President Obama’s plan, families earning over $250,000 would keep other tax breaks on the first $250,000 of income, including a lower bottom tax rate and preferential tax rates on capital gains and dividends — a savings of $12,112 per taxpayer. The top tax rates would be restored to those in effect in the 1990s when the nation added 23 million jobs.

The PBPC county estimates are based on 2010 taxable income data published by the Pennsylvania Department of Revenue. You can read more about the estimates and analysis here.