The federal government is on course for large spending cuts and tax increases starting January of 2013. This comes from a combination of three things: the end of some of the Obama administration stimulus that began in 2009; the end of large tax cuts, especially for the wealthy, done under the Bush administration; and automatic spending cuts designed to reduce the federal budget deficit. While some of the tax increases would not fully take effect until April 2014, and others could be reversed, the right wing is using fears of a ‘fiscal cliff’ to try to extend tax cuts for the rich and block planned cutbacks in military spending.
The largest immediate impact will be felt by jobless workers, as the federal Emergency Unemployment Compensation (EUC) program will close down in January unless Congress extends funding. The EUC provides an additional year of Unemployment Insurance (UI) benefits after the state UI is used up at the end of six months. There are now about 2.5 million unemployed people collecting EUC who will lose their benefits if Congress doesn’t act. The other federal UI program, Extended Benefits (EB), has already been shut down in a compromise with the Republicans, dropping 500,000 jobless workers from Unemployment Insurance.
The other group facing an immediate impact is low and middle-income workers, who will see their Social Security payroll tax rate rise from 4.2% to 6.2% when the 2% tax cut ends in January. This tax cut began with the American Recovery and Reinvestment Act (ARRA) (the Obama administration stimulus program that started in February 2009). There will be an immediate increase in the FICA withholding from workers’ paychecks in January 2013, reducing workers’ take home pay by 2%. FICA is the payroll tax that pays for Social Security and Medicare.
The impact of the end of the Bush-era tax cuts will take a longer period of time. The end of income tax cuts will depend on when the IRS issues new withholding rules. The higher taxes would be refunded in 2013 when people file their income taxes if some or all of the tax cuts are extended. In contrast, there is no mechanism and almost no chance that unemployed workers or low and middle-income workers will see any retroactive benefits or refunded payroll taxes if these programs are extended after the beginning of the year.
The end of other Bush tax cuts for stock dividends and reductions in the estate tax would be felt later since these taxes are not withheld. The Alternative Minimum Tax (AMT) would also cover more high-income (but not rich) households earning $200,000 to $500,000 per year, but this would not kick in until they file their 2013 tax returns in 2014. In fact, the AMT has been regularly cut back mid-year in previous years.
In addition to these planned tax increases, the failure of Congress to come up with spending cuts means that automatic cuts will start in 2013; half coming from the military, and the other half coming from other spending (except for Social Security, Medicare, and Medicaid). Cuts in domestic spending such as education and food stamps will be felt faster, while the military cuts will take longer.
The media and the right-wing have been calling these tax increases and budget cuts a ‘fiscal cliff’ to scare people into supporting extension of tax cuts for the rich and restoring spending on the military. While it is true that if all the spending cuts and tax increases continue for a number of months that the economy will fall back into a recession, there is no ‘cliff’ that the economy will fall off in January.
The only cliff will be for the millions of unemployed collecting federal Extended Unemployment Insurance benefits who will be cut off unless the EUC program is renewed. For working people and their allies, this is the most immediate fight: to renew and expand federal Unemployment Insurance benefits. There are more than 5 million people who have been out of work for more than six months, making up more than 40% of all unemployed workers. Half of these jobless workers are not collecting unemployment insurance benefits already. This group would be the hardest hit but is getting the least attention by the mainstream media.
Another fight for us to wage is to renew the payroll tax cut that mainly goes to low and middle income workers. Even better would be to return to the original Obama stimulus tax cut, which would also benefit the teachers and some other government workers who are not covered by Social Security and the self-employed who also pay Social Security taxes but not FICA.
An additional battle we have is the effort to extend the tax cuts for low and middle-income households, while letting the Bush tax cuts expire for higher incomes, dividends and the estate tax. Over the last 30 years, the rich have gotten richer and the poor poorer and more and more workers are just surviving paycheck to paycheck. The rich can afford to pay and should pay more.
Finally, we have to join the effort to stop spending cuts on domestic programs, such as education and food stamps, but to make even greater cuts in military spending. This effort will face stiff opposition from Republicans and some Democrats, who want the opposite: more military spending while cutting food stamps (which the Republicans in Congress recently voted to do).
While the Obama administration is ‘talking the talk’ on many of these points, we cannot rely on a Democratic victory in November to win these goals. Just look at what Obama promised working people in 2008: expanding voting rights for workers trying to unionize, immigration reform and universal health care. Card Check to unionize? Didn’t even try. Immigration reform? No legislation drafted, and in 2012 Obama gives temporary status to undocumented who came as children. He could have done this in 2009, but instead deported record numbers of immigrants. Universal health care? Obama’s reform will subsidize private insurers and expand Medicaid (which pays so little that many doctors won’t accept it) and still leaves millions without health insurance.
We need to continue to build a grassroots movement to fight against putting the burden of austerity on poor and working people for 2012 and beyond.