Update on “The Fiscal Cliff”

Posted on: November 5th, 2012 by NADO Admin

Currently, Congress is on recess and many lawmakers are in full campaign mode in preparation for the November 6 elections. A lame-duck session of Congress is slated to begin on November 13, after the elections. One of the top issues lawmakers face in the lame-duck session is how to address the looming “Fiscal cliff,” which is a loose term to describe the financial debacle that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 (P.L.112-25) are scheduled to go into effect.

The laws set to expire on December 31 include last year’s temporary payroll tax cuts, the end of certain tax breaks for businesses, shifts in the alternative minimum tax, the end of the Bush era tax cuts from 2001-2003, and the enactment of taxes related to the Affordable Care Act (P.L. 111–148). At the same time, the automatic across-the-board spending cuts agreed upon as part of the Budget Control Act of 2011 will go into effect.

In addressing the fiscal cliff, lawmakers have floated several options, none of which have reached consensus:

  • Congress can let the current policy scheduled for the beginning of 2013 go into effect.
  • Congress can cancel some or all of the scheduled tax increases and spending cuts.
  • Congress could take a middle course, opting for an approach that would address the budget issues to a limited extent.

Can a compromise deal be reached? Yes, but according to the National Journal the most likely option is another set of stop-gap measures that would delay a more permanent policy change until 2013 or later. The election will almost certainly have an impact on the direction of future spending and deficit policy, especially if one party earns a decisive victory in November. According to the non-partisan Congressional Budget Office (CBO), if Congress extends the Bush-era tax cuts but eliminates the automatic across-the-board spending cuts (sequestration), the result could be minor economic growth with no negative impact to the U.S. economy in the coming year, but Congress would still need to work out a broader debt savings deal in the future.

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