By TEDDYE SNELL
News pundits and politicians are clamoring to make their voices heard about the looming federal budget decision that, if not made by Dec. 31, could send America over the edge of the so-called “fiscal cliff.”
Local residents may be left scratching their heads, wondering what it all means, and how any budget decision – and the timing for when it’s made – will affect them.
Dr. John Yeutter, associate professor of accounting at Northeastern State University, explained that narrowly speaking, the “fiscal cliff’ is a set of automatic tax increases and spending cuts that will begin in 2013 if Congress does not reach an alternate agreement.
“For the average person, there are at least three issues that will affect them,” said Yeutter. “One is the Payroll Tax Holiday; another is the Alternative Minimum Tax; and the third is the expiration of a variety of current tax benefits, including tax rates.”
Yeutter said the payroll tax holiday is not technically part of the fiscal cliff, but it is set to expire at the end of 2012.
“For the past two years, workers have paid 2 percent less in Social Security taxes – 4.2 percent instead of 6.2 percent of wages,” said Yeutter. “This was done as an economic stimulus measure, to put more cash into the hands of middle-class workers. For someone making $60,000 per year, this is $1,200 – or $100 per month – more in taxes that they will pay, and thus $100 less per month to spend. Since workers stop paying into Social Security wages above $110,000, this is a tax increase that will specifically impact lower- and middle-class workers.”
According to Yeutter, who is also a certified public accountant and certified financial planner, the Alternative Minimum Tax was created to prevent those with high incomes from paying little or no taxes after taking deductions.
“The AMT includes an exemption amount of $33,750 for unmarried people, and $45,000 for married couples,” said Yeutter. “Taxable income above that amount is taxed at 26 percent. Every year until this year, Congress has passed an ‘AMT Patch’ that increases the exemption so the average taxpayer will not have to pay this tax. If the patch is not passed, a single parent with one child earning $52,000 will be subject to this tax for 2012.”
Congress often passes tax bills that expire after several years. Yeutter said some would particularly affect the average Oklahoman.
“The Indian Employment Credit and Depreciation provision – which expired at the end of 2011 - allows businesses and employers an incentive to locate on Indian reservations and ‘former Indian reservations in Oklahoma,’” said Yeutter. “The educator deduction allows school teachers who do itemize deductions to deduct up to $250 of their out-of-pocket cost of school supplies. This provision expired at the end of 2011.”
The “Bush Tax Cuts,” set to expire at the end of 2012, lowered tax rates at all levels, and added a reduction of the marriage penalty, according to Yeutter.
“The marriage penalty is a variety of provisions in the law that cause married taxpayers to pay more in tax than if they were not married,” said Yeutter. “The provisions in the ‘Bush Tax Cuts’ include having those married filing joint returns’ standard deduction twice that of the single deduction.”
As an accountant, Yeutter is concerned about the effect of the fiscal cliff on tax season.
“One result from this that will affect all taxpayers is that the uncertainty about current law has limited the ability of the IRS and tax software companies to prepare for coming tax season,” said Yeutter. “It is likely, if the expired deductions are extended, that many taxpayers will not be able to file their taxes electronically until March, so that the IRS processing system can be adjusted to reflect these changes. This was true for some situations this past spring; it will affect many more this year.”
As of Wednesday night, neither Congress nor Obama had conceded to compromise. Obama is resolute in raising taxes on the wealthy; the GOP in Congress insists on cutting federal programs.
But the stalemate may be ending. Thursday morning, Sen. Tom Coburn, R-Okla., told MSNBC that raising taxes on the wealthy may not be the worst short-term fix for the fiscal cliff dilemma.
“Personally, I know we have to raise revenue; I don’t really care which way we do it,” Coburn told MSNBC.
“Actually, I would rather see the rates go up than do it the other way, because it gives us greater chance to reform the tax code and broaden the base in the future.”
Coburn is known for taking a tough stance on “pork barrel spending,” meaning he would generally prefer to see entitlement programs cut to reduce the deficit. But he’s taking a more pragmatic approach in this instance.
“I think [the GOP] is arguing over semantics; $800 billion is $800 billion, and it’s still going to be a negative drag on the economy,” he said.
Yeutter, like many, others, is skeptical about either party conceding or compromising.
Yeutter referred to a poll taken by Dr. Robert Nassau, who teaches tax law at Syracuse Law School.
He polled 59 tax law professors at law schools about various parts of the fiscal cliff issue.
Over half of the respondents, 54.2 percent, believe Congress will act before the deadline; 42.4 percent believe Congress will surpass the deadline and will act shortly thereafter; and 3.4 percent indicated they think Congress will refuse to act at all.
“Why would this group of professors, who represent an informed and relatively unbiased group, appear so pessimistic about the ability of Congress to resolve these issues?” asked Yeutter. “The fiscal cliff was created in early 2012, to force Congress and the president to compromise. They haven’t been able to do it yet. Even though there are severe consequences to not acting, some appear willing to let these provisions expire, rather than act in the best interest of the country.”
Yeutter believes this to be evidence of an unprecedented political problem.
“I can remember Sen. Everett Dirksen and President Lyndon B. Johnson working to compromise on major issues like Medicare,” said Yeutter. “I remember Rep. Tip O’Neal and President Ronald Reagan likewise working together to reach a solution. I do not see that type of statesman-like action from the political leaders on either side.”