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What the fiscal cliff debate means for you and your business

By now, you’ve undoubtedly heard, read or watched news coverage of the impending “fiscal cliff.” The term that is now dominating the news cycle refers to automatic increases in taxes and automatic cuts in federal spending set to take effect in January of 2013—absent congressional action.

The so-called “cliff” is one that has big industry implications according to the National Association of Electrical Distributors’ Vice President of Government Affairs Ed Orlet.

“The net result of the fiscal cliff will be an increase in taxes equivalent to 3.5% of the country’s gross domestic product. That’s about twice the largest tax increase in recent history,” Orlet said.

Related story: Southwire president, CEO talks about fiscal cliff

The non-partisan Congressional Budget Office (CBO) said in a recent report that the fiscal cliff would send the U.S. economy back into a recession and would result in a jobless rate of 9.1% by the end of next year.

“The fiscal cliff is a ‘perfect storm’ of tax and spending deadlines at the end of 2012,” said Chuck Konigsberg, National Electrical Manufacturers Association vice president for strategy and policy. “Without a negotiated compromise, the 2001 and 2003 Bush tax cuts will expire, seriously dampening consumer spending.”

Where did this fiscal cliff crisis come from?

It’s mostly the result of the provisions made during the deal to raise the debt ceiling during the summer of 2011. Orlet said it also came from, to a lesser extent, new tax provisions in the Affordable Care Act.

Despite the media frenzy, Orlet believes there is a silver lining around the edge of the “cliff.”

“The good news is it’s not really a cliff, it’s more a mudslide,” Orlet explained. “The new Congress will have time to prevent a fiscal calamity. The world will not end on New Year’s Day 2013 if Congress doesn’t address the fiscal cliff in its lame duck session.”

If Congress does nothing before the end of the year, the estate tax will increase, individual income tax rates will increase, the payroll tax holiday will expire, capital gains and dividend income rates will increase.

What does all of this mean for distributors?

Orlet believes this could cause big problems for many in the industry.

“The people that represent us in Washington will have a tremendous impact on the way we do business in the near future. Will they cut corporate tax rates in 2013? That’s all well and good but about half of NAED member companies function as pass-through entities, which means owners pay taxes on company profitability on their individual tax returns. So a big hike in the individual rates – which is scheduled to happen under current law – will be a big blow to a lot of NAED members,” Orlet said.

“Also, the estate tax is scheduled to go up. Another big hit to the large number of family businesses within NAED. In the rush to address all these loose tax-ends, LIFO inventory valuation will also be under attack,” He continued.

“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 would trigger a 27% cut in Medicare physician payments); and nearing the federal debt ceiling in January or February, which, as in 2011, could threaten U.S. solvency and global economic stability,” Konigsberg added.

What can be done?

Orlet urged distributors to talk to their elected officials about the issues that impact their businesses, encouraging them to go to NAED.org/tellcongress for contact information or to contact him directly at 888-791-2512 for help setting up a meeting with your member of Congress.

Related: NAED’s Blueprint for Economic Growth

Konigsberg expressed the need for action in D.C. “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,” he said.

What happens next in Washington?

“We remain at an impasse,” Senate Republican Leader Mitch McConnell (R-Ky.) said during a recent floor speech.

Despite the “impasse” a Washington Post article said talks between the president and Congress’ top leaders are “accelerating.” President Obama telephoned House Speaker John Boehner (R-Ohio) and Senate Majority Leader Harry Reid (D-Nev.) within the last few days while Boehner made plans for Republicans to meet with Bill Clinton’s Chief of Staff Erskine Bowles on Wednesday. Bowles is co-chair of the Simpson-Bowles Commission that proposed a far-reaching deficit reduction framework in 2010.

Basically where things stand at this moment Republicans still want spending cuts and Democrats still want some increases on income taxes. The Washington Post said the debate is about where it was in mid-2011.

Spokesman Jay Carney told the media the president would again speak with Boehner and Reid “at the appropriate time.”

The right time is apparently not in the immediate future. As a Politico article pointed out, “The two top fiscal cliff deal makers (Obama and Boehner) are meeting with everybody they can find—except each other.”

Until that “appropriate time” the country will continue to watch with the debate escalate. According to a new, national CNN poll, two-thirds of people questioned say the country would face a crisis or major problems if the U.S. went over the “cliff” at the end of this year and most people aren’t optimistic about a deal.

According to CNN Polling Director Keating Holland, “Americans aren’t sanguine about the prospects of a deal. Only 28% say that Washington officials will act like responsible adults in this matter, with 67% saying they believe they will behave like spoiled children.”

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