Federal cuts would hit the most fragile

President Barack Obama gestures during a statement on the fiscal cliff negotiations with congressional leaders in the briefing room of the White House on Friday, Dec. 28, 2012 in Washington. The negotiations are a last ditch effort to avoid across-the-board first of the year tax increases and deep spending cuts. (AP Photo/ Evan Vucci)
President Barack Obama gestures during a statement on the fiscal cliff negotiations with congressional leaders in the briefing room of the White House on Friday, Dec. 28, 2012 in Washington. The negotiations are a last ditch effort to avoid across-the-board first of the year tax increases and deep spending cuts. (AP Photo/ Evan Vucci) (Evan Vucci)
Posted: December 31, 2012

WASHINGTON - If President Obama and Congress ring in the New Year by tumbling over the fiscal cliff, the people who feel the biggest immediate impact will be those already facing some of the most dire circumstances.

Emergency unemployment benefits, which help people who have been out of work for more than 26 weeks and who have exhausted their state support, will be cut off without a deal, immediately ending financial aid for more than 2 million people across the country, including roughly 240,000 in Pennsylvania and New Jersey.

Those who are working will also see an immediate bite out of their take-home pay. A payroll-tax cut is set to expire that would raise the levy by 2 percent on anyone who gets a paycheck. There has been almost no talk of preserving this break, meaning that even with a last-minute deal, wage-earners across the country - about 77 percent of all tax filers - can expect an immediate tax hike, according to the nonpartisan Tax Policy Center.

"Unquestionably, the group that's going to be hit the hardest will be the two million unemployed workers," said Joel Friedman, vice president for fiscal policy at the left-leaning Center on Budget and Policy Priorities. "They get cut off immediately at the end of the year here. That's a sharp break for them."

Without a deal, the past week will be the last one covered by emergency unemployment benefits, though Democrats are reportedly pressing for an extension in last-ditch negotiations.

On the payroll tax, "that's going to be 2 percent of earnings that's going to come out of people's paychecks right away," said Eric Toder, codirector of the Tax Policy Center. "That's a chunk that affects the largest number of people. If you're making $50,000 a year, 2 percent of that is 1,000 bucks - $20 a paycheck."

The elimination of the tax cut is expected to cost taxpayers about $115 billion over the course of the year.

Those two provisions are among the most immediate, far-reaching effects the typical person will feel if lawmakers can't avert the roughly $500 billion in tax increases and spending cuts set to take effect Jan. 1.

Though the term fiscal cliff implies a steep, immediate drop, many of the effects may be felt more gradually, their impact small at first, but stinging more if weeks pass without a deal.

A plunge over the cliff could rattle markets and consumer confidence. The combination of reduced government spending and consumers' losing spending power to tax hikes would shrink economic growth and lead to a recession, most economists estimate.

But some of those effects could be avoided by quick congressional action after Jan. 1, when pressure for a deal will grow.

"The biggest issue is not just going over on Jan. 1, but really what people's expectations are" for the coming weeks, Toder said.

If New Year's Day arrives with no agreement in sight, the economic reaction could be much harsher than if a deal appears within reach and the fiscal pain looks as though it will be short-lived, he said.

The prospect of rising income-tax rates, for example, has drawn the most attention and could carry the biggest costs for most people. But the tax hikes might not hit immediately. The government could tell employers to keep tax withholdings the same as in 2012, at least for a time, delaying the effects. The issue also seems highly likely to be resolved for most taxpayers, because both parties agree on protecting existing rates for the vast majority of them; the dispute is over high incomes.

Similarly, the alternative minimum tax is a threat that could expand and hit some 28 million taxpayers, but both parties want to avoid that outcome, and the effects wouldn't be seen until taxes are filed, buying some time after Jan. 1.

Looming across-the-board budget cuts to defense and domestic programs have caused immense uncertainty and could hit a wide range of social services and employers. Within weeks, the cuts could cost jobs and erode social programs. But a deal early in the year could make the trims smaller, more gradual, or more targeted, and existing funds might cover short-term funding gaps, leaving it unclear how quickly programs or employment would be scaled back.

For these reasons, many have tried to rename the budget crisis the "fiscal slope" rather than the cliff.

There is no such leeway for people facing increased payroll taxes or set to lose emergency unemployment benefits.

"These are people who have been unemployed the longest, and suddenly they're just going to lose a check," said Douglas Holtz-Eakin, president of the right-leaning American Action Forum.

Many experts see the support as one of the most efficient ways to prop up the economy, because the money is generally used for basic needs, and thus goes right back into the economy.

For Tracy Mulvehill of Northeast Philadelphia, the $730 she gets every two weeks helps pay her mortgage, bills, and the note on a her 2010 Ford Escape.

Mulvehill, 49, worked two jobs while saving to buy her home. But in 2011, she lost her job as an office manager at a construction company, and in March, she was laid off from work cleaning an off-track betting site. She has received eight months of unemployment but is now near the end of her state benefits and could be left with nothing if federal aid falters.

"I just bought my house three years ago," she said. "I don't want to lose it."

Since 2008, the federal government has provided added unemployment benefits - currently 37 extra weeks in Pennsylvania, 53 in New Jersey - on top of the 26 weeks each state provides.

But with the federal benefit set to end, 110,000 people in Pennsylvania and 132,000 in New Jersey would become ineligible for anything beyond the state support. They would lose payments that are now as large as $573 per week in Pennsylvania and $611 in New Jersey.

Extending unemployment benefits for another year would cost about $30 billion.

"That holds the key to my near future for how I'm going to survive," Mulvehill said.

Other cuts are expected to hit with various levels of immediacy. Doctors could face reduced Medicare payments right away. Milk prices might gradually rise because of the failure to pass new farming legislation as action in Congress stalled.

Many worry that stocks will sink.

"The first impacts are going to be market-confidence impacts," said Holtz-Eakin, a director of the Congressional Budget Office under President George W. Bush.

Economists say businesses have delayed investments due to uncertainty about the cliff, and some measures already show falling consumer confidence.

Retailers worry about the ripple effect of consumers' losing a chunk of their spending power to tax hikes.

"Going over the cliff will effectively bring growth in our retail economy to a standstill, at least for the first quarter of next year," said David French, senior vice president of government relations at the National Retail Federation.

But the estimates vary in speed and magnitude. There is no gray area when it comes to the payroll tax or unemployment benefits for people such as Mulvehill.


Contact Jonathan Tamari at jtamari@phillynews.com or follow on Twitter @JonathanTamari. Read his blog, "CapitolInq," at www.philly.com/CapitolInq.

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