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The Fiscal Cliff: What it is and how it could impact your company

By Chuck Konigsberg, NEMA Chief, Strategy and Policy

Washington is increasingly focused on the looming “fiscal cliff” – major tax hikes and large across-the-board spending cuts that will automatically occur in January 2013 without congressional action.

Due to deepening uncertainty over whether Congress and the Administration will avoid the fiscal cliff, businesses can’t plan for the future.  Chairman Bernanke has attributed the current “fragility of the recovery” to this uncertainty. Morgan Stanley reports “the negative impact of fiscal cliff uncertainty is becoming widespread” and the nonpartisan Congressional Budget Office (CBO), as well as the International Monetary Fund, project that going over the fiscal cliff will push the economy into recession in 2013

In stark contrast, if the Administration and Congress avoid the cliff, CBO projects GDP growth of 4.4 percent and 2.2 million new jobs in 2013.  Unfortunately, the two parties are engaged in a high stakes game of political chicken that threatens to take the economy over the fiscal cliff.

What is the Fiscal Cliff

The fiscal cliff is a “perfect storm” of tax, spending, and debt deadlines at the end of 2012.  The most significant are expiration of the Bush tax cuts, automatic budget cuts and the federal debt ceiling.

The Bush tax cuts expire at the end of 2012.  Republicans want to extend all of the tax cuts. The President and congressional Democrats want to let the cuts for upper income earners (those earning over $250,000) expire.  Without a negotiated compromise, all cuts will expire impacting the middle class and seriously dampening consumer spending.

On the spending side of the budget, we face damaging across-the-board cuts (known as a “sequester”) of 8-to-10 percent in nearly all defense and non-defense discretionary programs in January 2013, and two percent cuts in Medicare, if Congress takes no action. These automatic cuts are mandated by the Budget Control Act that grew out of last summer’s debt ceiling negotiations. The cuts were triggered by the failure of last year’s Congressional “Super Committee” to develop a long-term debt reduction plan for the nation.  These severe austerity measures will further weaken our economic recovery.

The fiscal mayhem that faces us at year’s end also includes: expiration of dozens of tax incentives including the R&D credit; expiration of the “AMT patch” (that will impact 31 million middle income taxpayers filing their 2012 taxes); expiration of the “doc fix” (that prevents a nearly one-third cut in Medicare physician payments); expiration of the payroll tax cut; and hitting the federal debt ceiling which, as in 2012, could threaten U.S. solvency and global economic panic.

How to Eliminate the Fiscal Cliff:

Realistically, Congress cannot address all these issues in a 20-day, lame-duck, post-election session.  That is why NEMA and many other groups are urging Congress and the Administration to act now on a short-term agreement to:  extend current tax rates, cancel the automatic budget cuts, and address the other deadlines – while at the same time putting in place long-term reforms to stabilize the nation’s public debt.

You can reach Chuck Konigsberg at chuck.konigsberg@nema.org

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