Issues & AdvocacyFederal

Clock Ticks Down Towards Fiscal Cliff
By Andrew Goldberg, Managing Director, Government Relations & Outreach

As the rest of the country prepares for the holiday season, Congress and the President might find lumps of coal in their stockings as policymakers near the “fiscal cliff” deadline without a deal.

The fiscal cliff, a series of automatic budget cuts and tax increases slated to take effect at the start of the New Year, could have major impacts on the U.S. economy (see below). Democrats and Republicans alike say they want to avoid going off the cliff, but are still far apart on an alternative plan. House Speaker Boehner has told lawmakers they may have to stay in Washington over Christmas if a deal is not reached.

As with previous debates, the main sticking points are whether to end the 2001 and 2003 tax cuts (a.k.a. the “Bush tax cuts”) on higher income earners, something that President Obama has vowed to do but many Republicans oppose; and what spending reductions to make to entitlement programs like Medicare and Social Security, where Republicans support larger reductions than Democrats.

Last week, President Obama and Speaker Boehner traded proposals (below), both of which were immediately rejected as insufficient by the other side. However, private talks continue. Although some Republicans have stated publicly they would accede to a plan that raises taxes on higher earners – and Democrats acknowledge there will need to be changes to entitlement programs – both sides appear far away from serious proposals that meet somewhere in the middle.

Source: KL Gates

So how will this debate play out over the next few weeks? And what does it mean for architects and the built environment? Here is a quick rundown of the possible scenarios.

1. Grand Bargain: The two sides agree to a comprehensive long-term plan to reduce the budget deficit, reform the tax code and major entitlement programs and enact it before Dec. 31.

CHANCES: None. There simply is not enough time left in 2012 to do all the work needed for a full-scale plan.

2. Cancel the Cliff. Congress could pass a bill to extend the Bush tax cuts for everyone and cancel the scheduled budget cuts.

CHANCES: None. President Obama has said he would veto any bill that extends the tax cuts for higher income earners. Further, were policymakers to avoid making any tough decisions on the budget or taxes, it could trigger a sharply negative reaction in the financial markets and could see the credit ratings agencies lower the country’s credit rating, which would hammer the economy.

IMPACT: Although such a move would keep lower tax rates on all Americans, including architects, and avoid large-scale cuts to design and construction programs, the fall-out would not only damage the larger economy but lower public trust in government even more, making any future policy changes more difficult.

3. We Go Off the Cliff. Congress leaves town without a deal, and the tax hikes and budget cuts take effect.

CHANCES: Small (but not zero). Polls show that a majority of Americans would blame Republicans if no deal is made. The White House, therefore, knows that the President can draw a line in the sand on the tax cuts and the public will side with him should the country go off the cliff. But Republicans know that, too, suggesting that they will ultimately accede to the President – but not without major concessions on entitlements.

IMPACT: Large spending cuts to a wide range of programs, including design and construction programs at many agencies. In addition, taxes would go up on nearly all taxpayers.

4. A Down Payment. The sides agree to raise taxes on higher income earners, make some cuts to programs, and set up a process for Congress to debate tax reform in 2013.

CHANCES: Fair. This would give both sides a few face-saving victories, but mitigate the worst effects of the fiscal cliff. However, it would entail both sides making concessions that to date they have not been ready to make.

IMPACT: Tax rates would go up on higher income earners, and there would still be cuts to design and construction programs, though probably not as severe.

5. Retreat and Fight Another Day. The sides agree to extend the tax cuts for all but higher income earners, and leave the other debates to 2013.

CHANCES: Slim, but growing. This is an idea floated by a small but growing number of Republicans, who reason that they are going to have to give in on raising taxes on higher income earners eventually, and so they should rip the Band-Aid off and do it now. Then, in 2013, they will have more leverage over the President to demand long-term changes to entitlements and the tax code.

IMPACT: Tax rates would go up on higher income earners, but other changes deferred until 2013. However, the uncertainty of not knowing the long-term impacts of policy changes will continue to inhibit the economy.

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