One of the funny things about kicking the can down the road is that eventually you run out of road. Such may be the case for the 112th Congress as this legislative session comes to a close and our leaders in Washington, D.C., are faced with another opportunity to prevent an abrupt halt to whatever meager financial improvements we have seen in recent months. You see, unless Congress and President Obama act on a host of tax rates and benefits, they will expire at the close of this year, leading to a tax increase for nearly every American and coining a new phrase in Washington, Taxmageddon.
How did we get here? In December 2010, following massive defeats in the midterm election, President Obama along with the Democrat-controlled Senate and House of Representatives, and with Republican support, approved a two-year extension of a host of tax items, including the Bush-era tax cuts, something he had campaigned against in his 2008 race. These tax extensions came at a point when the U.S. economy was struggling and included a reduction in the payroll tax rate and an extension of unemployment benefits, leading the president to state, “This is real money that's going to make a real difference in people's lives.”
What the President opted not to do in the lame-duck session of 2008 was push for an extension of the debt ceiling or ask Congress to vote on the proposal of the Bowles-Simpson deficit reduction committee, which he appointed. These decisions led to the debt ceiling deal of last August, which resulted in an increase in the debt ceiling of nearly $1.5 trillion, or enough to get past the 2012 elections.
To briefly summarize, it is likely that later this year, we will be hitting the debt ceiling at a time when nearly $500 billion in tax hikes are set to occur and our nation's economic footing remains tenuous at best. And did I mention that all of this has to happen in the seven weeks after what is expected to be a very contentious and hyper-partisan election?
What exactly is set to expire? Well, a lot of stuff. In fact, enough stuff that it would throw nearly $3,800 of tax hikes on every American household. Here is a brief list of what the economic impact will be.
The expiration of the Bush tax cuts would increase income taxes on all Americans, including raising the bottom rate from 10 percent to 15 percent and the top rate from 35 percent to 39.6 percent. The expiration of these tax rates would immediately remove $165 billion from the U.S. economy.
The Social Security payroll tax reduction is also scheduled to come to an end, at an economic impact of $124 billion. This tax cut was funded by removing money from the Social Security Trust Fund.
The Alternative Minimum Tax (AMT) is set to hit nearly 31 million Americans at an average cost of $3,806 each. Keep in mind that Congress designed the AMT to impact fewer than 125 people; after implementation, it now impacts 31 million. (You may want to file this fact away when talk of the Buffett Rule comes up.)
The expiration of the current Estate Tax rates, which would return to a $1 million exemption and a 45 percent tax rate, devastating family-owned businesses.
To top it off, there are set to be nearly $20 billion in tax increases from health care reform legislation.
When you add all of these expiring tax items as well as the sequestered spending from the debt deal, there is the potential for an immediate loss of up to 3.5 percent of our national G.D.P.; a loss that could immediately thrust the United States back into an economic free fall.
What we need are bold action and long-term certainty. The current patchwork and temporary tax code is detrimental to the U.S. economy in the short-term and threatens our long-term fiscal health. Unfortunately, I have little faith that our leadership in Washington will be able to achieve such a bold outcome in the lame-duck session (we call it lame-duck for a reason, after all). Instead, it is likely that yet another short-term deal will be cobbled together, extending all of these taxes and increasing the debt ceiling for one year. And the can continues to be kicked down an ever-shrinking road.
Jon Melchi is HARDI's director of government affairs. Contact him at 614/345-HEAT (4328) or jmelchi@HARDInet.org.