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Are We Falling Off the Fiscal Cliff?

Tuesday, November 13th, 2012

Have you been hearing about the “fiscal cliff”? The “fiscal cliff” refers to a package of tax increases and budget cuts that will go into effect on January 1, 2013, unless Congress can agree to change them. Now that the election is over, expect Congress and the White House to fight over alternative bills to help us avoid the cliff..

Although they are not included in the “fiscal cliff” cuts, some politicians may want cuts in programs like Medicare, Medicaid, veterans’ benefits, and Social Security as part of a deal to not go over the cliff. The eventual solution may be hard on seniors, especially those who depend on Medicaid to pay for nursing care and those with serious illnesses, such as mesothelioma, and who depend on Medicare. However, other politicians say that they would rather go “over the cliff” than touch these essential programs.

To understand how we got to this point, we must go back to the early years of the George W. Bush administration. In 2001 and 2003, Congress passed two very large tax cut bills at President Bush’s urging. Because support for the bills in the Senate was weak, the Senate passed the bills under a process called “reconciliation” that limits debate and prevents bills from being filibustered.

The reconciliation process cannot be used if the bill would add to the federal deficit after ten years. And independent analysis of the bills said they would add to the federal deficit quite a bit. To work around the rules, the bills were set to expire at the end of 2010.

When the 2010 expiration date was near, President Obama and most Democrats in Congress wanted to allow the cuts for people who earn more than $250,000 a year to expire, but keep them for everyone else. But Republicans wouldn’t hear of it, and fought to extend all the tax cuts. Eventually the warring factions worked out a deal — the tax cuts would be extended two more years in exchange for an extension of unemployment benefits, payroll tax cuts, and other forms of relief for working and unemployed Americans.

Then in 2011 came the debt ceiling crisis. The “debt ceiling” is a sort of accounting procedure than began about a hundred years ago. The Treasury Department needs authorization from Congress to borrow money to pay bills. To save time, Congress passes blanket authorizations that allow the Treasury to borrow up to a certain point — the “debt ceiling” — before asking for another authorization.

These debt ceiling hikes usually pass automatically, but in 2011 House Republicans staged a showdown and balked at raising the debt ceiling. They told constituents they were keeping the nation from going into more debt. However, the raise was needed to pay for things Congress had already bought, and not raising the debt ceiling would put the United States in default on our bills, which has never happened before.

Congress could not reach an agreement on anything, and the deadline for the debt ceiling was looming. The resolution was the Budget Control Act of 2011. This was a very complicated bill intended to force Congress to agree, or else.

Very simply, the bill established a mechanism by which huge spending cuts and budget caps will automatically go into effect on January 1, 2013, unless Congress can come to some other agreement. Some programs, such as Medicare, Medicaid, Social Security, and veterans benefits, were excluded. But there would be big cuts in many other domestic programs and also cuts to the defense budget.

So there is the fiscal cliff — the automatic expiration of the Bush tax cuts plus the automatic cuts called for i the Budget Control Act of 2011, both of which go into effect on January 1, 2013. Unless Congress can do something about it before the end of the year, on January 1, 2013, nearly everyone’s taxes will go up and a whole lot of programs people rely on will be cut.

In the next post we’ll look at what’s likely to happen and why it might not be too awful if we did go over the cliff.