fiscal-cliff.pngPerhaps the most memorable “cliff scene” in modern motion pictures is the surprise ending in the film “Thelma and Louise,” the 1991 Hollywood classic starring Geena Davis and Susan Sarandon.

That will be an appropriate image to contemplate as a real-life cliff scene plays out at the end of this year—a “Fiscal Cliff” drama that will unfold December 31 unless Congress and the President take action to avert it.

Seven months from now, as most of us celebrate New Year’s Eve, several major legislative events are scheduled to occur almost simultaneously that, taken together, create a giant fiscal cliff our economy could drive right off.

The Congressional Budget Office recently summarized some of the issues Congress and the President must address before year-end to avoid this Fiscal Cliff. (See report, especially page three). Read more.

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The Fiscal Cliff: Thelma and Louise?

Wed May 30, 2012

fiscal-cliff.pngPerhaps the most memorable “cliff scene” in modern motion pictures is the surprise ending in the film “Thelma and Louise,” the 1991 Hollywood classic starring Geena Davis and Susan Sarandon.

That will be an appropriate image to contemplate as a real-life cliff scene plays out at the end of this year—a “Fiscal Cliff” drama that will unfold December 31 unless Congress and the President take action to avert it.

Seven months from now, as most of us celebrate New Year’s Eve, several major legislative events are scheduled to occur almost simultaneously that, taken together, create a giant fiscal cliff our economy could drive right off.

The Congressional Budget Office recently summarized some of the issues Congress and the President must address before year-end to avoid this Fiscal Cliff. (See report, especially page three).

(1) Expiration of the Bush-era income tax rate cuts. These cuts reduced income tax rates across the board to 10%, 15%, 25%, 28%, 33% and, on the highest income earners, 35%.

Veteran payroll professionals will remember that the tax cuts were enacted in the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) and the 2003 Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). But the tax cut legislation contained a sunset provision, requiring rates to revert to their pre-2001 levels at the end of 2010.

To prevent a mammoth tax increase in 2011 all these tax rates, including for the highest income households, were extended for two more years in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

Thus, on December 31, 2012, all the Bush-era income tax rates will automatically revert back to their pre-2001 levels—i.e., 15%, 28%, 31%, 36% and 39.6%. Obviously, with U.S. unemployment stuck above 8% and an economic crisis in Europe, no one wishes to see a sweeping tax increase take effect on Jan 1, 2013.

(2) Expiration of the 2011 and 2012 payroll tax holiday of 2 percentage points. Readers of the Human Resources Legislation Blog may recall that in late December 2011 and early February 2012 Congress debated a one-year extension of this popular employee tax break. Democrats and Republicans finally hammered out an agreement to extend the holiday first for January and February only and then for the rest of 2012, with the tax break expiring on December 31, 2012.

No wonder Washington insiders have come to call this double-expiration of these two tax cuts on December 31 “Taxmaggedon”!

(3) Automatic Spending Cuts. Also known as “Sequestration,” federal government spending cuts are scheduled to be triggered on December 31 unless Congress and the White House have agreed to a budget reduction plan for FY 2013 and beyond. Enacted as part of the August 2011 Budget Control Act during last summer’s federal budget deadlock, this law mandates automatic cuts in discretionary and entitlement spending, including mandatory cuts in military spending, unless Congress adopts an alternative deficit reduction measure.

(4) Expiration of extended unemployment insurance benefits. This special federal program is designed to provide extra unemployment insurance benefits to the long-term unemployed. At a cost of some $26 billion per year, it’s possible for some unemployed workers to receive up to 99 weeks of UI benefits under this and related federal-state UI programs. The emergency unemployment compensation program is authorized until, you guessed it, December 31, 2012.

(5) U.S. Government Debt Ceiling. At present federal spending and revenue levels Treasury Department officials estimate that the U.S. government will bump up against its legal debt limit of $16.394 trillion (yes, that’s $16 trillion dollars) towards the end of this year. Unless Congress agrees to raise the debt limit still higher, hitting the debt ceiling will force spending cuts and revenue increases to stabilize the federal government’s debt at present astronomical levels.

As the December 31 deadline approaches for these automatic spending cuts and tax increases, the public will expect Democrats and Republicans to put political brinkmanship aside and work together. Lawmakers will need to extend or modify some of the laws and allow others to expire on schedule, all the while acting responsibly to contain runaway federal budget deficits and what is obviously an unsustainable level of public debt.

Clearly, as the nation nears the Fiscal Cliff Washington DC will either show extraordinary political leadership and a spirit of compromise or go over the cliff into partisan polarization that will invite economic disaster.

To be sure, we recognize that 2012 is a hotly contested presidential election year, with the voters also deciding on all 435 House seats and one-third of Senate seats. For this reason we need to hold our collective breath until after Election Day, November 6. This will give a post-election, “lame-duck” Congress about six weeks to get behind the steering wheel and drive toward the Fiscal Cliff—hopefully ever mindful of Thelma and Louise!