Americans will pay Washington more, despite rhetoric from politicians saying they shot down most tax increases on New Year’s Day, and in the aftermath of what widely was described as a flawed federal budget bill the public should expect more federal fiscal drama in coming months.
“We have avoided crashing and burning,” Minnesota State Economist Tom Stinson said, but there remains enough uncertainty and anxiety to go around.
While income taxes will rise only on the richest 2 percent, the federal Social Security tax will go up.
Stinson said the average American tuned into the wrangling over the “fiscal cliff” of recent weeks thought it was only about “taxes on high-income individuals, and he did not realize that he had gotten some significant tax breaks (in recent years), one of which is going away.”
Someone making $50,000 a year will pay the Social Security Administration (listed as FICA on paychecks) $1,000 more in 2013 than in the past year, Stinson said. Even so, if Congress had not acted, higher income taxes would have taken two or three times that.
When Congress passed a fiscal cliff bill Tuesday night, it was just the first step to reducing the federal deficit. That cliff was averted, but much more debate remains.
Sen. Kent Conrad, D-N.D., chairman of the Senate budget committee, voted for the bill, but like most members of Congress, called it far from perfect.
“This is not, by any standard, a deficit-reduction plan,” Conrad said on the Senate floor Wednesday, a day before he retires from Congress. “As necessary as it is, no one should be misled that this deals with our deficit and debt, because it only makes our debt circumstance worse.”
Stinson compared the fiscal cliff to downhill skiing, which usually starts with a steep slope, then turns more gradual before another sharp decline. The fiscal debate is in the gradual area now, he said, before it turns steep again when the federal government reaches its debt limit late next month.
“It’s better than it would have been than if Congress and the president had not reached an agreement, but it is not great,” Stinson said.
Shortly after the U.S. House approved a bill Tuesday night to keep most President George W. Bush-era tax cuts in place. President Barack Obama described the deal as “a law that raises taxes on the wealthiest 2 percent of Americans while preventing a middle-class tax hike that could have sent the economy back into recession and, obviously, had a severe impact on families all across America.”
Stinson predicted that most Americans will be surprised that their paychecks will shrink this month after hearing so much during Washington fiscal cliff debate about preventing most tax increases.
“Twenty dollars a week does not seem like much in the grand scheme of things, but every week you probably spent that $20 and bought pizza or movie tickets or something discretionary,” Stinson said.
The biggest impact could be felt by restaurants and entertainment industries, Stinson added, because most people will continue spending about the same on items such as gasoline and groceries.
“This isn’t a big hit, but it is going to be noticeable,” he said.
Once people get used to the slightly smaller paycheck, they likely will notice an increase in political rhetoric as it comes time to reduce the national debt by cutting spending.
“In two months or three months you are going to see the most horrendous showdown you have ever seen,” predicted U.S. Rep. Collin Peterson, D-Minn. “Much worse than this. Get ready.”
Part of this week’s bill eliminated an existing law requiring automatic $1.2 trillion spending cuts over the next decade. That is expected to be the next big debate.
Obama and congressional leaders were negotiating how to avoid tax increases that were to expire and how to cut spending, both to help reduce the federal debt. At the last minute, after months of discussion, they only could agree to maintain the decade-old tax rates for most Americans, but not on other measures to manage the debt.
On top of that, Congress has not passed a federal budget for the year that began Oct. 1. That debate is due about the same time as the government reaches the legal debt limit.
The tax measure passed the Senate 89-8 on New Year’s Eve and the House 257-167 New Year’s night.
All senators from North Dakota, South Dakota, Minnesota and Wisconsin voted for the measure, but they were split in the House.
Peterson was the only House Democrat in those states to oppose the bill. The only Republicans from the four states voting for the measure were Reps. John Kline of Minnesota, Kristi Noem of South Dakota and Reid Ribble and Paul Ryan of Wisconsin.
Most in Congress said they voted for the bill only because it was needed, with no one voicing full support. They said they supported what they called a flawed bill because it protects middle-class families from most tax increases.
“I hate it with every fiber of my being because this is not the grand bargain that I hoped for or worked for or believed is so necessary to the future of the country,” said Conrad, budget chairman since 2006 and in Congress for more than 20 years.
The North Dakota Democrat said more revenue will be needed to help solve the debt problem, along with “more spending discipline with respect to the health care accounts.”
“By making these lower tax rates permanent, we create certainty for American families and businesses,” Sen. John Hoeven, R-N.D., said. “That certainty will stimulate business investment to create more jobs and economic growth, which will produce more revenues to reduce our deficit and debt, without raising taxes.”
The Republican senator added that he would have preferred a comprehensive approach instead of a limited bill and that “now, we need to work in a bipartisan way to achieve real savings to reduce our deficit and debt, as well as enact bipartisan entitlement reforms to preserve those programs for the long-term.”
Southern Minnesota’s congressman, a Democrat, agreed.
“While I’m disappointed that it isn’t the larger, go big-type deal I have been advocating for, this bill is a good first step and I’m pleased a compromise was finally reached to avert the fiscal cliff,” Rep. Tim Walz said.
For Walz’s Minnesota district, with an ever-increasing number of wind power farms, extending the wind production tax credit included in the bill is important. He also pointed to a provision that prevents a 27 percent cut in doctors’ Medicare reimbursements.
Sen. Amy Klobuchar, D-Minn., said she fought for a more complete answer to the federal fiscal woes, and will continue that.
“I voted for this compromise because the last thing we should be doing this New Year’s is sticking middle class families with a tax hike,” Klobuchar said.
“Medicare, Medicaid, and Social Security beneficiaries were protected,” added Sen. Al Franken, D-Minn.
“While I don’t think this package raises sufficient revenues toward paying down the debt or to make the investments in infrastructure, education and research and development needed to grow our economy, I knew that no bill would have 100 percent of what I wanted,” he said.
Rep. Michele Bachmann, R-Minn., said the bill will enlarge government.
“In the midst of the worst economic recovery since the Great Depression, America is at a moment that requires big solutions to big problems,” she said after voting against the measure. “Instead, Washington politicians have engineered a last minute backroom deal that does not address America’s jobs and debt crisis.”
Rep. Ron Kind, D-Wis., said the bill came through an ugly process.
“This is an imperfect process that has produced an imperfect bill, but it continues income tax relief to 98 percent of all Americans and small businesses while avoiding unnecessary economic damage to our economic recovery,” Kind said.
He added that the bipartisan process at the end was encouraging.
Sen. Ron Johnson, R-Wis., voted for the bill, but complained: “President Obama got what he demanded, a tax increase on the job-creating sector of America’s economy, ‘the rich.’ It will harm economic growth, hinder new job creation and, at most, reduce our annual deficit by about 5 percent.”
He also complained that Obama went back to Hawaii for his holiday vacation after Congress passed a bill that only raises 7 percent of revenues needed to plug the federal deficit.
The Forum News Service’s TJ Jerke and the Jamestown (N.D.) Sun’s Logan Adams contributed to this story.