The negotiations on the fiscal cliff are showing some movement but there is still a long way to go. Let's review where things stand. Both political parties are keenly aware that the deficit, the difference between what the nation spends versus what it takes in is expanding at a rate that is unsustainable. There is disagreement on why, some would say that the recession and the stimulus spending combined to lower revenues and expand spending. Others cite the tax cuts that were enacted during the Bush Administration that were continued with the Obama Administration. In addition there have been two wars and a prescription drug plan that have expanded spending and not have become covered by increased revenues.
The fiscal cliff is a term being used to describe a set of changes to taxes and spending. The changes in taxes are that the tax rates going back to what they were under the Clinton Administration (which means that when the tax rates automatically change the result will be that everyone will be paying more in income taxes). In addition there are also several tax deductions for education that will be impacted, such as the deduction for teachers buying material and parents deducting the payment for college. Plus the small reduction for everyone's payroll tax is scheduled to revert back. For the average family it is being estimated that their federal tax payments will go up by $2,000 - $4,000 in 2013.
The other part of the cliff is the sequester. This is a cut to defense spending of about 10% and non-defense by 8.2%. The defense cut hits on January 2nd. It hits every account and project equally. For education the January 2nd deadline would cause a one large program to be reduced, Impact Aid and then most everything else would see the reduction on July 1st (this is due to education being forward funded). Again, the sequester reduces every project and account. There is no ability for the government to manage the cut, and change individual programs so that it is an overall cut, rather everything gets cut.
The basic goal of all of this is to reduce the deficit by $4 trillion dollars in ten years. In many people's calculation the cuts of 2011 have already contributed $1 trillion. These cuts came from the domestic programs that are annually appropriated.
In the media one hears that the president is for changing the tax rates on the wealthiest. The speaker of the House is demanding cuts to entitlements. The Republicans don't want the defense cuts, the Democrats don't want the cuts to hit social security and Medicare/Medicaid and other entitlements.
What we need to be watching
First if we go over the fiscal cliff the effect will be that the deficit will be reduced. But almost everyone believes that it will trigger a continued, some are calling a double-dip recession.
There is no easy way out of the problem. Changing the tax rate on the wealthiest does bring in greater revenues but will not solve the problem by itself. Estimates on this change in tax rates range widely based on where the cut line is for "wealthiest." The sequester would result in about $1 trillion in savings which means to avoid it will require something else to be put in its place.
This week (December 17th) will be interesting because no one wants to be negotiating this after Christmas. Staff and the members of Congress all have tickets to leave town to be with their families. So this in effect the holiday becomes a mini-deadline. However, the reality is that even if the negotiators had an agreement today all of what they would have is an outline or what is called a framework. The details would come later. The problem is that few in Congress are willing to vote on a framework without knowing the details. Hence there is a bit of a dilemma for the negotiators, in that they have to figure out how to build a framework that will get the votes, before the fiscal cliff is hit but with no time to figure out the details that the Congress will want before they vote. And to add to that some believe that if we go over the cliff it will only be for a short time, as the Congress would return in January and work on details and forestall the negative impact on the economy.
So, in effect, the fiscal cliff is a deadline for some, Christmas is a deadline for others, which means that not all agree which deadline is the deadline.
Things education needs to watch
One idea floating around is moving requirements for Medicare and support for Medicaid to the states. States basically get 25% of their funds from the federal government, if those funds are cut and the requirements remain, state money would be needed to replace those federal dollars for required health programs. This would mean that to cover those costs education would be cut as that is the largest area of spending left in state budgets.
If the sequester isn't eliminated, then programs like Title I and IDEA will be reduced by 8.2% in July for the upcoming school year.
Also, some of the smaller tax issues, such as the deduction of teacher purchases and the cost to attend college is on the table for automatic elimination.
Still in play
The debt ceiling will need to be raised in February or March and members of Congress hate voting to raise the debt ceiling and to get their vote some will demand spending cuts.
They may also demand spending cuts to vote on any framework deal that is reached before or immediately after "the fiscal cliff" as a down payment.
This means that we cannot assume we are safe from cuts even as these other areas of negotiated. One of the reasons being is that when they cut education, they don't say they are cutting education. What happens is that the allocations to non-defense discretionary accounts are cut. We are in that group.
The sad thing is that these details involve people who are wondering about their futures.
December 17, 2012
Rich Long, IRA Government Relations
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