The road signs are indicating danger ahead for the national economy -- and hazards for Pennsylvania residents -- if major tax breaks are allowed to expire and deep spending cuts go into effect at the end of this year.
The looming "fiscal cliff," as it has come to be known, is a steep and painful plunge that the U.S. economy could suffer due to higher income taxes as well as automatic federal spending cuts that will take place Jan. 1, 2013, if members of Congress fail to put their legislative foot on the brakes.
"The Congressional Budget Office has said if the automatic spending cuts go into effect it will reduce the federal deficit to $641 billion next year [compared to more than $1 trillion this year], which is good news," said Curt Knotick, CEO of Accurate Solutions Group in Butler County.
"But when you reduce it that quickly, it will hurt GDP and potentially people will lose jobs, and it throws us back into a recession."
Pennsylvania residents could feel the trickle-down effects.
A study done by George Mason University in Fairfax, Va., predicts Pennsylvania residents not only would be faced with a higher tax bill but estimates the state would lose some 78,454 jobs if the Bush-era tax cuts are allowed to expire and the government begins to automatically reduce its spending for budget items such as defense, Medicare and unemployment benefits.
Congress is not expected to take any action until after the Nov. 6 presidential election.
Federal legislators have a wide range of options, which include extending all of the tax breaks and completely eliminating the spending cuts. Lawmakers also could vote on compromises that would lessen the effects of both fiscal events occurring at once.
The automatic spending cuts stem from the Budget Control Act of 2011, which is the result of negotiations reached by both houses of Congress when they agreed to raise the national debt ceiling last year. The national deficit currently stands at $16 trillion and is growing.
Tax increases would spring from the expiring tax breaks the Bush administration put in place in 2001, which were extended to Dec. 31, 2012. If Congress does nothing, the highest income tax rate would go back to the pre-Bush level of 39.6 percent. Many tax deductions would be decreased or eliminated.
And the 2 percent payroll tax holiday, instituted after the start of the Great Recession to leave more money in consumers' pockets, also would be a thing of the past.
In addition to the tax breaks due to disappear, the increases related to the Affordable Care Act are due to kick in. This includes the 3.8 percent tax that will be levied on most investment income for singles earning more than $200,000 a year and couples earning more than $250,000. Capital gains tax rates also are set to jump from 15 percent to 20 percent.
An analysis by the Tax Policy Center in Washington, D.C., estimates American households will see their tax bills rise by an average $3,500 if the nation continues to go over the fiscal cliff. In total, about 88 percent of households will end up with higher taxes in that scenario.
Uncertainty over what tax rates will be next year has been problematic for accountants and financial advisers, said Karen Lapina, a financial adviser at Fragasso Financial Advisors, Downtown.
"We don't know what the tax structure will be for both income taxes and estate taxes until Congress decides if it will let all this happen or taper it a bit," Ms. Lapina said. "It's difficult to make long-term recommendations.
"If we have a client with a large chunk of highly appreciated stock, we suggest they sell at least part of the shares to take advantage of the 15 percent capital gains rate. Next year, that same client may be subject to a tax rate of up to 23.8 percent."
Adam Yofan, president of Alpern Rosenthal Financial Services, Downtown, said middle-class Americans could feel a double whammy if the fiscal cliff triggers a downward spiraling stock market, which causes 401(k) balances to fall.
"A lot of companies will see sales dry up, and that may drive stocks down further," Mr. Yofan said. "The average American consumer won't have as many discretionary spending dollars.
"Companies may not book as much revenue, resulting in lower profits, and potentially lower stock prices," he said. "Lower stock prices may add to the stress of the average American consumer further contracting his spending -- and the vicious cycle continues."businessnews
Tim Grant: email@example.com or 412-263-1591