DEAL REACHED ON JANUARY 1, 2013: SEE UPDATE BELOW
The fiscal cliff has been dominating media outlets since the presidential election. The term “fiscal cliff” refers to expiring Bush-era tax cuts, the payroll tax, Alternative Minimum Tax (AMT), Medicare payments to doctors. These expiring provisions, along with the sequestration (cuts to federal agency budgets) that takes effect Jan. 1, 2013, could cause significant problems for the economy and may push the U.S. economy over the “cliff,” resulting in serious fiscal issues felt across the nation.
Current law, stemming from the debt ceiling negotiations of spring 2011, states that if lawmakers do not find a solution to reduce the deficit by $1.2 trillion over the next decade, automatic spending cuts for the federal government would begin. The spending cuts include $64 billion in defense and nondefense programs, as well as a $330 billion tax increase (expiration of ” Bush Tax Cuts”). Each fiscal threat is important, but the expiring Bush-era tax cuts are the most relevant to the commercial real estate industry.
1. Go off the Cliff: Congress does not act by the January 1, 2013 deadline and allows the tax cuts to expire, raising taxes to pre-Bush levels, and cutting government program spending across the board. This could cause consumer spending to shrink, massive job losses, and create instability on Wall Street. This scenario would also create new pressure on the Republican leadership to drop their hard-line approach on voting for tax increases and instead work across the aisle to create different tax systems. This also allows lawmakers to avoid any political repercussions for increasing taxes while reducing the deficit.
2.Postpone Action: Congress could drag their feet and buy more time. There is potential for legislation that would delay the impending tax hikes and cuts to move forward, thus putting off the looming fiscal crisis by a year or so. This would reduce panic on Wall Street and allow for more substantive policy negotiations to take place. This may sound appealing, but it simply delays the problem and further creates more uncertainty for businesses. It also puts President Obama in a difficult position, in that he made a campaign promise to end the Bush-era tax cuts by Jan. 1, 2013, for America’s wealthiest citizens.
3.Make a Deal: Republicans and Democrats work frantically to create a long-term deal. This would require enormous compromise and discussion from both Speaker Boehner and President Obama. This deal would have to address both tax cuts and tax increases in the lame-duck session, which would be a significant task in such a short period of time. House Republicans have passed H.R. 8, whereas Senate Democrats have passed S.3412. These bills tackle the fiscal cliff in very different ways and would require significant negotiations on both sides. President Obama supports the Senate version.
UPDATE: As of November 30, no substantial movement has occurred to avoid falling off the fiscal cliff. President Obama has proposed a $1.6 trillion tax increase (for couples making over $250,000 or individuals making over $200,000), $50 billion infrastructure plan, and a new plan to raise the federal debt limit. Republicans in the U.S. House have rejected the plan saying it is not a balanced approach.
UPDATE: On December 3, U.S. House Republicans have put forth a plan to avoid the fiscal cliff. The GOP plan includes a $2.2 trillion cut from the deficit through spending cuts, entitlement reforms, and tax revenue. This plan was rejected by President Obama because it does not include a tax increase on wealthy Americans.
UPDATE: Fiscal cliff discussions continue on Capitol Hill this week as the January 1 deadline looms. Although there are no substantive or concrete plans being revealed, the potential for an agreement remains hopeful. On Monday, December 10, Michael Steel, Speaker Boehner’s spokesman, could not release details of the talks. He did hint that the Republican Party continues to stand firm on the GOP offer made last week. The White House has hardened its stance on raising the debt ceiling, further complicating the discussions. Steel also said that lines of communication between the White House and Boehner remain open. Currently the two greatest obstacles to avoid falling off the fiscal cliff are tax increases on the wealthy and cuts to entitlement programs.
UPDATE: On Friday December 14 Speaker Boehner offered to increase taxes on incomes over $1 million and extend the debt limit for one year. President Obama offered to lower tax revenue from $1.6 trillion to $1.4 trillion over 10 years Final negotiations are pending but this is a sign that concessions will be made on both sides of the fiscal cliff debate.
UPDATE: On January 1, 2013 Congress prevented the U.S. economy from going off the fiscal cliff. President Obama signed H.R. 8 into law January 2.