The Fiscal Cliff: A Primer

NCPA November 12, 2012

With almost no time to celebrate his reelection, President Obama must quickly come to an agreement with lawmakers on the "fiscal cliff," a combination of spending cuts and tax increases that pose a threat to the fragile economic recovery, says the Tax Foundation.

The fiscal cliff includes such things as:

• Expiring provisions of the 2001 and 2003 Bush Tax Cuts.
• A compromise that will increase the estate tax.
• A patch in the Alternative Minimum Tax.
• A temporary 2 percent payroll tax holiday.
• Five new taxes as a result of the Affordable Care Act.
• In total, the tax increases are slated to cost around $514 billion.
• Additionally, there are spending cuts of $109 billion.

The federal government is borrowing an average of $2.7 billion a day. As a result, the debt is expected to approach the ceiling by the end of 2012, possibly as late as February 2013. Lawmakers expect another political fight between Republicans who resist any future increases to the debt, at least without spending cuts, and Democrats who favor increasing the debt without any future deficit reduction plans.

In the debt ceiling negotiations between Obama and Congress, lawmakers failed to agree on a $4 trillion deficit reduction plan. A law passed in August 2011 stated that if Congress was not able to implement a deficit reduction plan over the next 10 years, then there would be automatic cuts to both defense and non-defense discretionary items. This was done in part to make the cuts so unreasonable to both parties that there would be cooperation in coming up with a deficit reduction plan.

In addition to the debt ceiling, Congress will also pass a new budget or a continuing resolution before March 2013. The last federal budget was passed in April 2009 and since then any spending authorizations have been done through continuing resolutions. In the upcoming year, Congress has the chance to enact a new budget that can reevaluate the priorities of different programs that receive federal funding.

Source: "The Fiscal Cliff: A Primer," Tax Foundation, November 8, 2012.