Fiscal Cliff or Not, the Next Few Weeks Will Mean Money Out of Your Paycheck

Issues raised by the deal leading to the so-called fiscal cliff - and other tax changes - will take a bite

By Patrick Healy
|  Friday, Dec 21, 2012  |  Updated 7:53 PM PDT
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Washington has yet to come to an agreement on the looming fiscal cliff. If Congress does not take action, taxes will increase. It may also affect local businesses, such as the Jet Propulsion Laboratory in Pasadena. Patrick Healy reports for the NBC4 News at 5 p.m. on Dec. 21, 2012.

Patrick Healy

Washington has yet to come to an agreement on the looming fiscal cliff. If Congress does not take action, taxes will increase. It may also affect local businesses, such as the Jet Propulsion Laboratory in Pasadena. Patrick Healy reports for the NBC4 News at 5 p.m. on Dec. 21, 2012.

Whether or not you fear going over the so-called Fiscal Cliff will plunge America back into recession, without Congressional action, this convergence of deferred change will affect your pocketbook.

You will notice it in your very first paycheck of the New Year.

"People's taxes definitely will change," said Douglas H. Joines, PhD, Professor of Finance and Business Economics at the USC Marshall School of Business. Joines agreed to help
NBCLA sort out what what will happen if Congression cannot agree on steps to take.

First off, the social security payroll tax "holiday" of the past two years will end. It had been enacted at the urging of the Obama Administration as a stimulus to consumer spending as the economy claws back from the Great Recession heralded by the Crash of 2008.

Temporarily lowered to 4.2 percent of gross pay, employee portion of the payroll tax will rise back to 6.2 percent. Do the math: that's a thousand dollars less to spend if you make $50,000 a year; two thousand less if you make $100,000.  Income beyond a ceiling, raised to $113,770, is not subject to the payroll tax

As a consolation, you will have the satisfaction of knowing you're contributing more to the long term fiscal integrity of the Social Security Administration.

Congressional compromise is not likely to change the payroll tax. More attention is being focused on income tax.

The end of the President George W. Bush-era income tax cuts will raise personal income tax rates 3-5 percent, depending on your bracket.

"Every bracket goes up," observed Joines.

It is an outcome wanted by virtually no one in Washington. Any income tax increase is anathema to Republican ideology. To the extent higher taxes are seen as necessary to limiting painful cutbacks, Democrats and the White House want to limit them to higher incomes.

But like an on-rushing locomotive without brakes, the two rounds of tax cuts enacted in 2001 and 2003 will simply expire unless Congress reaches a compromise. The bottom bracket tax rate of 10 percent would go away entirely. Top marginal rate would increase from 35 percent to 39.6 percent (for annual income over $398,350.).

Prof. Joines notes that in broad terms, the tax code returns to where it was during the Clinton Administration.  It was, in fact,  a time of prosperity, but many economists attribute that to the dot.com boom rather than the tax code. As a disciple of supply-side economist Arthur Laffer and the Chicago School of economic philosophy, macroeconomist Prof. Joines observes: "These rates are not terribly damaging, but higher rates are not good."

The increased tax rates for 2013 you would, of course, notice at filing time in 2014, and before then if your employer adjusts your paycheck withholding.

It's also expected more taxpayers would be subject to the Alternative Minimum Tax, perhaps as many as 46 percent of the returns from those married filing jointly, according to the Tax Policy Center. It projects 28 million fillers will pay, on average, an additional $2,250.

Joines notes that though the tax code reverts on New Year's Day, that's not a deadline for compromise, and Congress could later undo the changes.

Regardless, the social security payroll tax is not likely to be undone. Nor is the new 3.8 percent surtax on investment income earmarked to cover costs of healthcare reform.

Taxes Are Only One Facet of What Awaits at the Bottom of the Fiscal Cliff

The delayed trigger on the Budget Control Act of 2011 will cut 10 percent out of many federal programs that support jobs. "Sequestration" is the euphemism used to describe the process of cutting a total estimated at $1.2 trillion.

"There can be some real impact throughout the national economy and here locally," said Robert Kleinhenz, PhD, Chief Economomist at the Los Angeles Economic Development Corporation's Kyser Center.

So concerned is the Economic Development Corporation, it formed an action group called the L.A. Jobs Defense Council to spread the word and pressure Congress to find a way to avoid plunging over the fiscal cliff.

Worst case scenario, Kleinhenz foresees businesses closing and California losing as many as 225,000 jobs, and $22-billion in economic activity.

The biggest impact would be on the defense industry, particularly aerospace. It has not been as large a component of the Southland economy since the end of the Cold War two decades ago. But Kleinhenz emphasizes it remains significant and an economic bedrock in areas including the South Bay and Antelope Valley.

The office of Rep. Howard P. "Buck" McKeon (R-Santa Clarita), Chairman of the Armed Services Committee, produced a video that lays out anticipation of a devestating effect on the local economy.

One of the companies McKeon's video highlighted is Aerowire Technical Services in Lancaster. Veteran aerospace engineer Velma Searcy founded the small business in 2010 to supply wiring harnesses for aviation.

Searcy now has 12 employees and hopes to continue expanding.  But the prospect of sequestration has clouded the future, putting new projects on hold. "If it happens, I might not be here next year. So it's just a scary thing right now," Searcy told KPCC's Brian Watt.

Nearby Desert Haven Enterprises finds jobs for the developmentally disabled. One of its contracts is with Edwards Air Force Base.

"To lose contracts of this nature could eradicate the Antelope Valley as we know it today," Executive Director Jennie Moran said in McKeon's video.

"So much of this is in the power of the Congress, and that includes the timing," said Kleinhenz.

NASA stands to be affected, and so, conceivably, could be operations at the world renowned Jet Propulsion Laboratory in the foothills on the border of Pasadena and La Canada Flintridge.  But at this point, nobody knows for certain.

"It's not exactly clear how the cuts will be implemented, nor the timing," said Kleinhenz. "But we are looking at nationally something in the neighborhood of 80 to over a $100-billion in (defense) cuts."

A sampling of the spectrum of other anticipated impacts was enumerated by the the LA Jobs Defense Committee in a letter sent to the Senate's so-called "Gang of Eight" leaders. 

The list includes:

• 11,902 fewer children will be served by Head Start throughout California.
• 27,816 fewer Los Angeles residents would receive HIV/AIDS testing.
• 261, 521 low-income individuals will be cut-off from Community Service Block Grant aid.
• 14,919 fewer Californians would receive substance abuse training while another 7,184
domestic violence victims would go un-served.
• 1,920 California education jobs will be lost, 296,172 fewer students served, and 506
fewer schools would receive federal grant funding.
• 331,676 fewer students in California would receive education and skills training for high demand
jobs.

There are fears the combine impacts of sequestration and higher taxes could slow economic growth enough to drag the U-S economy back into recession. Kleinhenz contends the uncertainty itself is slowing the economy.

"Arguably, there's already been a cooling effect," Kleinhenz said.

Others see the "fiscal cliff" as more of a "fiscal slope." and see the potentially damaging effect as cumulative over time.

"To tip us into recession, we would have to go a substantial amount of time without an agreement," Prof. Joines said.

The clock is ticking. 

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