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Is there a silver lining to the 'fiscal cliff?'

By   /   November 28, 2012  /   2 Comments

By M.D. Kittle / Wisconsin Reporter

MADISON – Wisconsin taxpayers could be in a world of hurt should federal lawmakers plunge the economy off the fiscal cliff, but the state’s coffers could be in line for a shot of increased tax revenue – at least in the short term.

But would congressional inaction be so bad? Is there a silver lining to this looming fiscal tsunami of higher taxes and deep spending cuts?

At least one economic expert say going headlong over the economic precipice wouldn’t necessarily be such a bad thing for a debt-ridden nation with leaders unwilling to make tough decisions.

Deep impact

The clock is ticking on an a congressional agreement that would ward off the expiration of a host of George W. Bush-era tax cuts and the implementation of some $1.2 trillion in spending cuts. If some kind of deal on debt relief or at least a delay isn’t reached, the federal fiscal carriage turns into a pumpkin on Jan. 1.

President Obama and congressional leaders keep talking as the U.S. economy moves ever closer to the “fiscal cliff.”

Middle-income taxpayers in particular could be looking at thousands of dollars in tax increases, from the loss of child care tax credits to significantly higher estate – or death – taxes, Rob Reinhardt, program supervisor for the state’s nonpartisan Legislative Fiscal Bureau tells Wisconsin Reporter.

“It’s going to be a big hit to people’s pocketbooks,” he said of a host of tax breaks and credits taxpayers stand to lose.

Reinhardt estimate sstate payouts to Wisconsin residents receiving the Earned Income Tax Credit would decline by about $23 million, and roughly $150 million in federal earned income benefits would dry up due to shifting income thresholds.

The lapse of current federal Estate Tax exclusion would cost Wisconsin taxpayers about $125 million in 2014, according to Reinhardt’s estimates.

Also on the chopping block: The temporary 2 percent payroll tax cut benefiting some 160 million workers, and the per-child tax credit would be halved, to $500, should the tax breaks expire.

The consequences would have a degenerating effect on an economy struggling to fully recover from the Great Recession.

“As it sits right now, if they (Congress) do not act, taxes are going to go up for everybody, which puts fewer dollars in consumers’ hands, which will affect not only the national economy but the state economy,” said state Rep. John Nygren, R-Marinette, incoming co-chairman of the Legislature’s Joint Finance Committee.

Nygren and others point to Wisconsin’s improved fiscal situation over the past two years, moving from a $3.6 billion shortfall to projected excess revenue of $283 million by the end of the current two-year budget cycle in June 2013.

But those rosy estimates by Gov. Scott Walker’s administration are tied to baseline economic forecasts that don’t consider the fiscal cliff, said Reinhardt. Those estimates, from state-contracted analyst Global Insight, project national Gross Domestic Product at 1.9 percent next year, and GDP of 2.8 percent in 2014 – sans fiscal cliff.

When higher taxes and deep spending cuts are factored in, the forecast shows nothing short of recession nationally, with GDP at -0.5 percent in 2013, followed by anemic 1.3 percent growth in 2014. The same estimates peg no growth in the current fourth quarter, contraction of 2.3 percent in the first quarter of next year and a -1.6 percent decline in GDP in the second quarter.

While Reinhardt said Wisconsin is in a lot better fiscal shape than other states, if the sour economic forest comes to pass the state’s revenue draw could decline sharply. A percentage point drop in revenue equates to about $140 million, he said, and it is not inconceivable the state could see like declines if national GDP slides.

And Wisconsin, like the rest of the nation, faces deep spending cuts.

Cutting deep

Sequestration, the mechanism that automatically turns on spending cuts if Congress doesn’t act, would erase about 5.5 percent of federal grants to the Badger State, as a percentage of state revenue, according to a Pew Center on the States study, “The Impact of the Fiscal Cliff on the States.” The reduction is less than the 6.6 percent national average, but it would be a significant hit, economists say.

“About $1 billion in University and research funding would be seriously affected,” said Donald Hester, professor emeritus at the University of Wisconsin-Madison.

Hester, an economist for more than 50 years, said the fiscal cliff is doubly troubling because of the slow economic recovery following the last recession and entrenched unemployment, with millions of Americans facing the loss of extended jobless benefits.

While the state would take in more revenue through increased income and estate taxes, he doesn’t see how the short-term increases will offset deep spending cuts and the higher tax burden on middle-class Wisconsinites.

He predicts Congress’ inaction will lead the nation over the fiscal cliff.

Dale Knapp isn’t sure the automatic implementation of tax hikes and spending cuts is an altogether bad thing.

The research director at the Wisconsin Taxpayers Alliance does believe the “fiscal cliff” is the wrong name for what the nation faces.

“It isn’t like we’re going over the cliff and things aren’t going to be the same,” Knapp said. “Taxes will go up and spending will go down and that is going to have an economic impact, but that’s not going to come right away.”

The real concern, Knapp said, is Congress delaying the real problems of rising federal deficits and a $16 trillion debt. The upside of Congress doing nothing is something finally starts happening in debt control – automatically, Knapp said.

“If Congress Band-Aids over it, the long-term implications are more troubling with the debt,” he said. “It’s one of those things of, do we take the pain in the short-term or do we do something about debt and deficits and work through the economic consequences, or do we put a Band-Aid on it and have more consequences long-term with exploding debt?”

Contact Kittle at mkittle@wisconsinreporter.com

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  • BOB DIXON

    The gargon recession is what I hear constantly. What’s the difference between that term and depression?

  • http://Iloveyourpodcasts Harry Boyle

    Before Obama was elected I told my friends that he would do more to destroy the US than any country or group of countries could do against us.

    So for 4 years that is all that took place. Under the guise of our economic problems he got away with it all.

    As he continues with his destruction process why is it that guys like you have not stated the obvious. He does not want a deal. He can cause more destruction by the economic cliff being fallen over. He could care less about jobs or unemployment. Uneducated Americans propped up by the media bought into his story to their own peril.

    You need to call him out on it before he totally crashes everything. I think I am right and do not feel this is an off the wall comment. The next 30 days maybe all the US has left until we citizens are mortally hurt.

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