By TEDDYE SNELL
Congress and the White House may have avoided plunging the country over a fiscal cliff Jan. 2, but a new budget is far from complete, leaving state legislators in a bind as they also try to plan for a new year.
“Whenever we certified funds in December, [the budget] was roughly $7 billion,” said Rep. Mike Brown, D-Tahlequah. “When our state tax commission looks at that [for apportionment], they have to also look at what the federal government is doing.”
Brown said if the current agreement – The American Taxpayer Relief Act of 2012, which was approved Jan. 1 – remains in place, Oklahoma will still have to reduce its budget by $50 to $60 million.
“It could be, if no agreement is reached at the federal level [on a new budget] in a few weeks, we could go into sequestration at the federal level,” he said.
According to ideamoneywatch.com, “sequestration” is a fiscal policy procedure adopted by Congress to deal with the federal budget deficit. It first appeared in the Gramm-Rudman-Hollings Deficit Reduction Act of 1985. Simply put, sequestration is the cancellation of budgetary resources, or an “automatic” form of spending cutback. The cuts are automatic, across-the board reductions to all discretionary programs, and the executive branch has no authority to redistribute the cuts.
Under sequestration, education funding will be subject to cuts ranging from 9.1 percent in 2013, to 5.5 percent in 2021, according to the Center on Budget and Policy Priorities.
“If sequestration is still in play, it could have an effect on federal programs and result in reduction of $130 to $200 million,” said Brown. “And we’re talking education programs, including Title 1, Impact Aid, vocational rehabilitation, special education and adult literacy programs.”
Brown said legislators will return to Oklahoma City in February to certify funds they use to build the state budget.
“It depends on what happens at the federal level as to how we plan,” said Brown. “We’re looking at a 7 to 8 percent budget reduction if sequestration takes place. As far as I know, health care issues are not on the table, and neither is transportation. It will just be areas we need the most: education.”
Both of Oklahoma’s senators voted for the fiscal cliff deal, but both agreed the fix leaves much to be desired.
Sen. Jim Inhofe, R-Okla., said one of his greatest concerns about the fiscal cliff involves sequestration, which could cut defense funding.
“This deal avoids those cuts for two months to allow for a better solution,” said Inhofe in an interview with The Oklahoman. “While I would like to have sequestration addressed, I am hopeful the deal’s two-month delay will help us better prioritize deep spending cuts while protecting our military and national security.”
Sen. Tom Coburn, R-Okla., agrees there is still work to be done.
“While this bill is far from perfect, it does prevent massive tax increases, while making tax cuts permanent for 99 percent of Americans,” said Coburn. “Congress and the president, however, have a lot of work to do to address our long-term spending problem.”
The new tax law also has an effect on individuals, according to Dr. John Yeutter, CPA, associate professor of accounting at Northeastern State University, and certified financial planner.
“The American Taxpayer Relief Act of 2012 did not extend the 2 percent payroll tax reduction [for Social Security], so everyone can expect to see less in their 2013 paychecks than in 2012,” said Yeutter. “[Also] there are two tax incentives that apply specifically on Indian reservations and ‘former Indian reservations in Oklahoma.’ One affects depreciation of business property, and the other gives employers a tax credit for hiring enrolled members of tribes and their spouses.”
Yeutter said the new law also created a three-tiered tax rate on dividends and capital gains.
“Taxpayers with taxable income – including capital gains and dividends – of less than about $35,000 for singles, $70,000 married, pay no tax on their capital gains and dividends,” said Yeutter. “This rate is useful to retirees or others whose income is low and primarily from investments.”
Yeutter indicated taxpayers earning above $35,000 or $70,000, but who make less than $400,000 as singles or $450,000 married, pay a 15 percent tax on capital gains and dividends. But there is also a 3.8 percent additional tax if their income is above $200,000 single or $250,000 married, making another 18.8 percent sub-tier.
“Finally, taxpayers with taxable income in excess of 400,000 single, 450,000 married – including capital gains and dividends – pay a 23.8 percent tax, including the 3.8 additional tax on their capital gains and dividends,” said Yeutter.
Retirees over age 70-1/2 are required to take minimum distributions from their Individual Retirement Accounts. According to Yeutter, a provision allowing a direct transfer to charities, which would then not increase their income, expired at the end of 2011. Congress allowed this to continue, retroactively.
“But here’s the complication: The distributions were required to have been made before the end of 2012, and we didn’t know if Congress would extend this before the end of the year,” said Yeutter. “Congress included a provision that says if you took a distribution from your IRA in December 2012, and made a contribution to charity after the date of distribution but before the end of January 2013, it can count as a direct transfer. People affected by this should contact the charity and a tax or financial planning professional to assure this is done correctly.”