Post-Election Calm? Nope. What You Need to Know About the Fiscal Cliff
Was it a victory, or was it the start of a new battle?
Even as Barack Obama was rolling up his win Tuesday night, capturing nearly every state he won in 2008, House Speaker John Boehner was telling supporters that Republicans would not compromise on letting the Bush tax cuts expire. President Obama's convincing victory in the electoral college came in part from his promise to make the wealthiest Americans "pay a little more."
But on Tuesday night, Speaker Boehner pointed to continued Republican control of the House of Representatives and said, "With this vote, the American people have also made clear that there is no mandate for raising tax rates."
And with that, our newly elected (and re-elected) officials in Washington set themselves back on a track heading straight toward the precipice now known as the "fiscal cliff."
If nothing changes, on January 1 most working Americans will find themselves taking home less pay, as the Bush income tax cuts and the Obama payroll tax cut expire. Those who rely on supplemental unemployment insurance will be left to fend for themselves. Doctors will earn less from seeing Medicare patients. And across the federal government, drastic cuts will begin to curb government spending.
This is what Federal Reserve Chairman Ben Bernanke called the fiscal cliff, and he and many other economists worry that if all of these tax increases and spending cuts take effect simultaneously, the U.S. will send itself into a self-inflicted recession.
Which of these will most affect entrepreneurs? Over at the National Federation of Independent Business, the conservative lobbying group, tax counsel Chris Whitcomb says that the most urgent business in Washington is to postpone the tax cuts for everybody.
Taxes "are the biggest part of the entire fiscal cliff, and will have the biggest economic impact," Whitcomb says. "The ability to plan for business decisions has been impacted already by the uncertainty, especially over what the tax rates will be in 2013."
Naturally, Democrats and their allies don't see it that way. Most businesses, they say, have much more to fear in how cuts to spending, especially stimulus spending, will affect on the economy.
"If I'm a small-business person, the one thing I don't want to see is the expiration of the payroll tax cuts, because I'd like to have my customers with a bit of a boost to their paycheck," says Jared Bernstein, a former top economic adviser to Vice President Joe Biden. As for manufacturers, he continues, "they're doing a little bit better, so they want to see that we keep the momentum that we have, and not let gridlock screw it up."
There are areas of broad agreement, however, including one sure to make the business owner smile: shoring up investment incentives. So-called bonus depreciation is set to expire this year, and rules (in Section 179 of the tax code) that allow small companies to take big deductions for many expenses are set to become much less generous. Republicans and Democrats alike want to extend bonus depreciation, and raise the limits on expensing.
So who will make the first move? Jim Manley, who worked for years as a close aide to Senate Majority Leader Harry Reid, says it's up to the re-elected president.
"The president is going to have to insert himself more forcefully in the process," Manley says. "I'm waiting for him to send a signal quickly after the election to indicate how he plans to proceed."
Tom Perriello, head of the Democratic-aligned Center for American Progress Action Fund, says that Obama has to take his case directly and intensely to the American people, much as he did with student-loan reform. "More public engagement in this debate will be better for the quality of the deal than less," Perriello says.
Republicans will remain under enormous pressure to hold the line on taxes. Grover Norquist, the anti-tax activist who has won pledges against tax increases from most Republicans, sees no reason to let up.
"Republicans in the House passed the Ryan budget plan--twice, in 2011 and 2012--and they all for re-election on that," he says. "You have a Republican party with a radical agenda, a fundamental reform agenda that has been tested in elections. I think the Democrats have an infinitely more difficult position."
Democrats, for their part, have been willing to concede some spending cuts in their quest for a grand bargain. "The Democrats have all along not been very good at hiding the cards they have," says Perriello. And, says Manley, they could agree to some extensions, including the business tax incentives and an alternative minimum tax patch--a short-term "downpayment" on a long-term deal.
In a statement on Wednesday afternoon, Boehner also said he was open to a downpayment on a bigger deal. As part of that bigger deal, he said, Republicans would be open to additional revenue, so long as it was paired with deep spending cuts and didn't come from higher tax rates.
But emboldened by a decisive White House win, an expanded majority in the Senate, and at least a few extra seats in the House, they seem less likely to budge on taxes. So the pre-election Republican position, backed by allies such as the Chamber of Commerce, to extend all of the tax cuts and postpone all of the spending cuts until the leaders work out a deal is not likely to win over many Democrats, who seem more inclined to let the tax cuts expire and start from scratch next year, presumably making it harder for Republicans to resist.
"If you raise all the rates, anything that you do later on to cut them, is going to be scored by the Congressional Budget Office as a tax cut," Manley says. (Though not by Norquist, who characterizes the maneuver as telling the American people, "we had a vote, but because we did it in an interesting order, please don't notice that we raised your taxes by $100 billion." Says Norquist: "I don't think that passes the laugh test.")
This, then, means taking a plunge off the fiscal cliff. But Democrats take comfort from an analysis from the liberal-leaning Center for Budget and Policy Priorities, which argues that most of the effects of the cliff will not be felt immediately, giving politicians a chance to reach a deal.
"To the extent that the fiscal cliff conjures up in people's minds a Wile E. Coyote moment, that's wrong," says Chad Stone, the Center for Budget and Policy Priorities's chief economist. "It's better to describe it as a fiscal slope rather than a fiscal cliff. You have some time--but not a lot of time--to work things out."