Fiscal Cliff Could Hit Iowans in at Least 20 Ways
Jennifer Jacobs with the Des Moines Register lists 20 ways Iowans will be affected if we all fall off the fiscal cliff, which she has downgraded to a fiscal porch. Nonetheless, those 20 ways are adaptable to the other 49 states. Not only is this a helpful read if you’re struggling with the entire sequester issue and what it means, it could be turned into a state specific article by reporters in your state. Why not send it along with a request for them to do just that?!
‘Fiscal cliff’ could hit Iowans in 15 least 20 ways
So, if the nation tumbles over the “fiscal cliff,” what would it mean for Iowans?
Without action by Congress, a host of tax policies that shield Iowans from higher taxes will expire in three weeks.
Iowans’ lower purchasing power could slow the pay-down in household debt, said David Swenson, an economist at Iowa State University.
“This economy is primarily depending on households unwinding from high indebtedness and becoming confident enough to not just consume, but to begin consuming bigger-ticket items like appliances, cars and, eventually, houses. A fiscal showdown that ends in no action will make that more difficult,” he said.
That heavier tax burden, blended with the 10 percent across-the-board federal spending cuts meant to battle burgeoning federal debt, could hurt Iowa and the national economy — but the situation really isn’t as dire as advertised, in Swenson’s view.
“I have decided that my favorite metaphor is fiscal porch,” Swenson said. “More of an economic dope slap than anything else.”
Still, the government’s cutback on spending would ultimately result in the loss of jobs. And Iowa’s economy is still vulnerable: The state must add another 60,000 jobs to recover those lost since the start of the recession nearly five years ago, Swenson said.
The three likeliest scenarios of how the fiscal cliff situation will play out, officials concur: There’s an agreement before the end of the year on how to avert the across-the-board cuts. There’s a short-term deal that punts the debate until the new Congress convenes. Or the nation goes over the cliff on Jan. 1 and stays there for a short time before a deal is made.
Here’s what’s at stake for Iowa if no deal is struck:
- LESS MONEY FOR IOWANS TO SPEND EACH MONTH: Everyone who pays income taxes would see their take-home pay shrink.
In Iowa, the median two-child family (with an income of $76,777) would pay $3,383 more in 2013 than in 2011 if all George W. Bush and Barack Obama-era tax cuts expire, according to a Tax Foundation study.
To put that into perspective, it would mean about $282 less in purchasing power per month.
- HIGHER PAYROLL TAX: A big chunk of that hit would be from losing the 2 percent cut to employee-paid Social Security payroll taxes. That cut was supposed to be temporary anyway, as a recession stimulus, Swenson noted. The average Iowa job this year will pay about $38,500. For that average worker, take-home pay would drop by $770 next year, Swenson said.
The median two-child family would pay $1,536 more without the payroll tax cut, the Tax Foundation says.
- HALVING THE CHILD TAX CREDIT: The child tax credit would go from $1,000 per child to $500 per child. This change would affect Iowa families making less than $130,000 a year.
- INCOME TAX HIKE: The remainder of the higher taxes would be from the loss of Bush-era income tax cuts, which were expected to expire two years ago. The average tax increase on Iowans from the expiring Bush tax cuts would be $1,882 next year, according to the Tax Foundation. The median Iowa two-child family would pay $847 more.
- SMALL BUSINESS OWNERS HIT HARDER: Iowans who take in more than $1 million would pay, on average, about $254,000 more in taxes, or about 11 percent of their income, according to the Tax Policy Center.
“‘Let the rich pay a little more’? It’s pure propaganda. It’s not a little bit more. It’s a lot more,” said Oskaloosa’s Bob Wersen, who owns Interpower Corp., which has a workforce of 75, and Tassel Ridge Winery.
Small business profits flow straight onto owners’ income tax returns, putting them in the “mega rich category” even if they pay themselves a relatively modest salary, Wersen said. Partly because of the fiscal cliff, Wersen put on hold a major expansion at the winery and hasn’t replaced seven Interpower workers who have left the company since the summer, he said.
- HIGHER UNEMPLOYMENT: As the government cuts back spending, the national economy would shrink by 0.5 percent in 2013, causing unemployment to jump from 7.9 percent to 9.1 percent in the fourth quarter of 2013, according to the Congressional Budget Office.
But after next year, economic growth would pick up, and the labor market would strengthen, shrinking the national unemployment rate to 5.5 percent by 2018. The forecast hasn’t been broken down by state levels, an Iowa Workforce Development spokeswoman said.
- HIT ON DEFENSE CONTRACTORS: Any entity that depends on government spending, and any federal employees, would be vulnerable.
In Iowa, the impact would be harsh for contractors like Rockwell Collins, a Cedar Rapids-based aviation electronics manufacturer that gets about half its business from defense spending worldwide.
Even before any cuts take place, the uncertainty that comes from the looming fiscal cliff is having a “stifling effect” on companies’ ability to operate, said Clay Jones, Rockwell Collins’ CEO. “What’s going on in our company is going on in thousands of companies around the United States,” Jones said. “That uncertainty has already had a drag on the economy and will continue if not resolved.”
Rockwell Collins warned that it could see a loss of 300 jobs globally and $20 million in slashed revenue next fiscal year.
- PINCH ON STATE SERVICES: About 150 state programs could see cutbacks, including those for special education, bioterrorism, clean water and national highway system projects.
Many programs are there to help families survive during hard times, such as a nutrition program for women, infants and children, job training, Meals on Wheels for seniors, home heating or air conditioning assistance for low-income Iowans, and assistance in paying for drugs people need to combat AIDS.
The overall impact on the state will be in the $70 million range, said Holly Lyons, director of the state’s Fiscal Services Division.
Congress’ fiscal cliff stalemate makes state budget planning more difficult, House Speaker Kraig Paulsen and Senate Majority Leader Mike Gronstal said on “Iowa Press” Friday.
- PINCH ON HOSPITAL SERVICES: Federal funding for hospital services would drop by 2 percent with the across-the-board cuts.
Coupled with cuts from Obamacare, the reductions could mean longer wait times for emergency room care, according to Kirk Norris, president of the Iowa Hospital Association. Other impacts, he said: Fewer medical caregivers, which squeezes access to care; less patient access to the latest treatments and technologies; fewer specialty services, particularly in rural areas; increased charity care and bad debt; and reduced financial capacity for continued hospital investments in community-based programs and services.
- IOWANS WOULD PAY LOWER STATE TAXES: Iowa is one of six states that allows a deduction for federal income taxes. Higher federal income taxes mean bigger deductions for Iowa taxpayers — and that means lower state income tax bills.
On the flip side, that would have a big impact on the Iowa budget, putting a pinch on state services. State tax revenue would fall by $90 million,
an impact that would hit in the first six months of 2013, Lyons said.
- SOME MORE REVENUE, BUT MORE EXPENSES FOR THE STATE: The state treasury would reel in more tax money because some of Iowa’s deductions are linked to federal deductions. If the federal deductions for the Earned Income Tax Credit, estate tax and Child and Dependent Care Credit are reduced, the state would collect more money, according to a Pew Center for the States report.
The rub: “Increased unemployment, lower disposable income, and lower spending mean both lower income and sales tax revenues and an increase in the number of individuals who would qualify for state safety net programs such as Medicaid and unemployment insurance,” the Pew report says.
- IOWA’S LESS DEPENDENT ON THE FEDS: Iowa wouldn’t be as affected by the scheduled across-the-board cuts as many other states because of the makeup of its state budget and its economy.
Federal money accounts for a lower percentage of Iowa’s GDP than the national averages, Pew found.
- STABILIZING FEDERAL DEBT COULD HELP IOWA: The spending cuts in the fiscal cliff would curb short- and medium-term deficit problems.
Without these measures, growing debt levels will result in lower economic growth due to higher interest rates, more borrowing from foreign countries and less domestic investment, all raising the risk of a fiscal crisis in which the government can’t borrow money at affordable interest rates, the Pew report says.
“States are closely intertwined with the federal government and, in the long term, they certainly would benefit from a healthier federal budget and national economy,” the Pew report says.
The current statutory debt limit is $6.394 trillion. As of Nov. 27, debt subject to that limit stood at $6.279 trillion, or $15 billion below the statutory ceiling, a Congressional Budget Office report says.
- HIGHER ESTATE TAX: The estate tax rate would jump to 55 percent. Amounts over $1 million would be taxed.
This worries Iowa farm families, who could have to sell off part of their land to pay the taxes.
Right now, the rate is 35 percent.
- HIGHER CAPITAL GAINS TAXES: The capital gains tax would rise from 15 percent to 23.8 percent.
“You only get hit if you claim the capital gains,” Swenson noted.
Some Iowans thinking about selling their farms have been spurred to do it before the end of 2012, but Swenson doesn’t see a problem there.
“Perhaps a bigger issue might be the consequences of defensive behaviors in that investors begin to dump stocks that have had rich appreciation,” Swenson said. “Stocks are a hell of a lot more liquid in the short run than ag land.”
- LESS HELP FOR ADOPTIONS: The current adoption tax credit would expire. Currently, eligible taxpayers can claim two adoption tax benefits, although the combined level of qualified expenses was limited to $13,360 in 2011. The adoption tax credit would be available only for special needs adoptions.
- LOWER DEDUCTION ON STUDENT LOANS: The student loan interest deduction would be reduced.
- EXPIRATION OF WIND ENERGY CREDIT: The wind energy production tax credit, an incentive Iowa politicians say spurs growth in the wind industry here, is set to expire.
- ROCK ISLAND ARSENAL CUTS: Military operations would be affected — meaning unknown cuts could take place at military installations like the Rock Island Arsenal. It’s unclear what the Defense Department will cut exactly if pushed off the cliff — but it would be a massive cut, U.S. Rep. Bruce Braley’s staff said.
- NATIONAL GUARD IMPACT: “It’s truly too early to tell what impact cuts would have on the Iowa National Guard,” Col. Greg Hapgood said. But he said he’ll provide updates as information becomes available.