The months of debate about the “fiscal cliff” is eye-glazing, but as the edge approaches, many are anticipating a true white-knuckle plunge.
Going over the cliff would have severe consequences for New Yorkers, according to economists and other experts. They warn that it would increase the likelihood of sliding back into a recession and said Congress and the Obama administration should do everything they can to work out a deal.
The term fiscal cliff refers to the projected effects of a combination of tax increases and steep, across-the-board spending cuts that will take place if Congress and the Obama administration fail to find an alternate plan to reduce the federal deficit by the end of the year.
“We will feel this in multiple ways,” said Brad Lewis, a professor of economics at Union College.
Lewis said the spending cuts and tax hikes would be painful because they would result in everyday people having less money, causing the total demand for goods and services to drop sharply. A drop of this magnitude would hurt the economic recovery by reducing the spending that fuels job creation and growth and could send the country back into a recession, he said.
“When you’re short of full employment, it’s hard to see the benefit of cutting back at the federal level,” Lewis said, suggesting Congress focus on increasing the employment rate rather than cutting the deficit.
At a time when so many people are out of work, the federal government’s focus is misplaced, he said.
The spending cuts set to go into effect Jan. 1 would impact almost every federal program. The defense budget would be cut, as well as Medicare, unemployment benefits and food stamps. This process of across-the-board cuts to domestic programs is known as sequestration; experts estimate the cuts would likely be around 8 percent, with $110 billion per year cut over the next decade. The cuts are split evenly between defense and domestic programs.
“These cuts would be very painful,” said Aaron Pacitti, an assistant professor of economics at Siena College. “They would hurt very, very vulnerable groups.”
Many of the domestic programs targeted “keep people just above the poverty line,” he said.
Social Security is exempt from the automatic cuts, but groups such as AARP worry that Congress and the Obama administration will agree to cut Social Security and Medicare as part of a deal to avoid going over the cliff.
According to AARP New York, 2.4 million senior citizens receive Social Security, with an average annual benefit of $14,600. For the typical senior in New York state, Social Security makes up about 58 percent of their income and keeps about 32 percent of them out of poverty, while also pumping about $45.6 billion into the state economy by ensuring that seniors have money to spend.
One proposal being discussed would change the way cost-of-living adjustments are calculated. Right now, such adjustments are calculated using the Consumer Price Index, which measures changes in prices. Under the proposal, adjustments would be calculated using the Chained Consumer Price Index, which adjusts for changes in consumer behavior. The chained index grows at a slower rate than the traditional index, and using it could slow the growth of Social Security.
But AARP estimates this change would take roughly $7 billion out of the pockets of elderly New Yorkers over the next 10 years by reducing the cost of living increases they have come to expect.
“Social Security goes to people who use it to buy goods and services,” Lewis said. “If you cut back on it, you’re cutting back on retirees’ ability to buy things.”
Chris Widelo, AARP New York’s associate state director, said Social Security didn’t cause the deficit, so it shouldn’t be cut as part of a deal aimed at reducing the deficit.
“Social Security is not a way people are getting rich ... it’s keeping people above water,” he said.
Widelo said Social Security does have problems — as the large Baby Boomer generation retires, experts expect the program to be under increasing strain — but these problems should be addressed in a separate process.
“Social Security is a benefit people have paid into, and they’re expecting that money to be there for them,” he said.
Congress is also considering raising the eligibility age for Medicare from 65 to 67. AARP says this change would leave 331,713 New Yorkers without health coverage, forcing them to buy private insurance at an average additional cost of $2,200 per year.
Pacitti said the term fiscal cliff isn’t really accurate.
“It’s more of a fiscal slope,” Pacitti said, noting that the impact of the cuts and tax hikes would be felt gradually. “It’s not like on Jan. 1 everyone is going to have $1,000 less than they do now.”
Others prefer to describe the fiscal cliff as an “austerity crisis.” Austerity refers to the process of cutting spending to reduce the deficit, and opponents believe austerity is the wrong approach to take at a time when the U.S. is still struggling to recover from a severe recession.
Sara Niccoli, director of the liberal Labor-Religion Coalition of New York State, said social justice groups are concerned about the impact cuts and tax hikes triggered by the fiscal cliff would have on the elderly, poor and middle class. The group would like to see the Bush tax cuts extended for everyone but the top 2 percent of earners.
“The tax increases are probably too much all at once,” Niccoli said. “The spending cuts will make huge cuts to social services this country needs.”
The coalition will express its concerns about austerity Monday at a rally on the state Capitol steps.
Other groups, such as the conservative Empire Center, in Albany, are also concerned about going over the cliff. In an op-ed article, the Empire Center’s E.J. McMahon expressed concern about the tax hikes scheduled to go into effect.
“Any compromise relying heavily on soak-the-rich tax increases seems likely to draw a bulls-eye on the Empire State,” he write.
McMahon noted that in 2010 “New Yorkers earning $1 million or more generated 14 percent of the entire nation’s federal individual income taxes in that bracket,” and as a result, “any federal deficit-reduction deal relying on income-tax hikes is likely to hit harder in New York and other states with large pockets of wealth.”
Among the tax cuts set to expire:
• The Bush tax cuts, which cut individual income tax rates, lowered the estate tax and tax rates for capital gains and dividends and expanded a number of tax credits. If Congress doesn’t act, the Bush tax rates would automatically revert to Clinton-era rates.
• The payroll tax cut, which went into effect in 2009 to help stimulate the economy during the recession. It would result in a 2 percent tax increase for workers, if eliminated.
• Expansion of the Earned Income Tax Credit, the child tax credit and the American Opportunity Tax Credit, which helps families pay for college tuition, included in the 2009 stimulus bill.
Pacitti said defense budget cuts, which are estimated to be about 9 percent for most Pentagon programs, wouldn’t have a major impact on the Capital Region, mainly because the area is not home to a “huge concentration of defense contractors.”
The elimination of the payroll tax cut, Pacitti said, would be far more damaging. That cut benefits everyday workers by increasing the amount of money in their paychecks, and removing it would reduce their spending power.
“Tax cuts have different effects on different income groups,” Pacitti said.
Top earners are less likely to spend the extra money they receive through a tax cut because they already have a lot of money and there are only so many things a person can buy. Middle and lower income workers, on the other hand, have less money and are more likely to spend whatever extra money they do get, which benefits the economy.
The battle over the fiscal cliff is a continuation of the protracted 2011 dispute over raising the country’s debt limit. Congress agreed to raise the debt ceiling, but only if the increase was coupled with spending cuts designed to reduce the country’s deficit. As a result, the Budget Control Act of 2011 was passed, calling on Congress to produce a plan for cutting spending by $1.2 trillion over 10 years and containing painful cuts and tax hikes — the so-called fiscal cliff — that would go into effect if Congress failed to reach a deal by the end of this year.
The spending cuts and tax hikes were designed to be painful to Democrats and Republicans alike, and thus force Congress and the Obama administration to come up with a less painful plan for reducing the deficit.
Obama has proposed raising taxes on people earning more than $250,000 and extending the Bush tax cuts for everyone else. Under the president’s proposal, the higher tax rate would apply only to the portion of income over $250,000; a person earning $300,000, for example, would be taxed at the Bush rate on the first $250,000 of their income and at the Clinton rate on the remainder.
But Republicans have balked at increasing taxes for those higher earners.
To Pacitti, the Obama proposal makes a lot of sense. He said letting the Bush tax cuts expire for top earners but keeping them in place for everyone else would increase revenue while middle- and low-income workers maintain spending.
He said top earners “have been doing very well over the past five years,” while everyone else has struggled. If unemployment were lower — around 4 percent — it might make sense to eliminate the Bush tax cuts entirely, he said.
Lewis said he had been following federal debates over deficits for decades, and the fiscal cliff discussion was “depressingly familiar.” He said the deficit has little to do with the overall economy, and high deficits do not hurt growth.
“I tend not to pay very much attention to deficits at all,” Lewis said.
According to the jobs report released Friday by the Department of Labor, the U.S. added 146,000 jobs in November, causing the unemployment rate to fall from 7.9 percent to 7.7 percent, the lowest since December 2008.