By Larry Jones
December 17, 2012

With just a little over two weeks remaining before tax increases and across-the-board budget cuts are scheduled to take effect, it is still unclear if an agreement will be reached in time for the government to avoid going over the so called fiscal cliff. Unless the President and Congressional leaders agree on an alternative compromise by the end of the year, most taxpayers will see their taxes increase and most federally assisted state and local programs will be automatically cut. Just in case Congress fails to agree on a compromise, the Budget Control Act approved last year will require automatic across the board spending cuts in order to reduce the federal deficit and help put the nation’s fiscal house back on a path to fiscal health.

Commenting on the fiscal cliff during a December 12 conference call with President Obama, mayors and other local elected leaders from across the nation, Conference of Mayors President Philadelphia Mayor Michael A. Nutter said, “We recognize the need for the federal government to get its fiscal house in order, and we encourage Congress and Washington to work together to find a bipartisan and balanced solution to achieve deficit reduction that facilitates, not undermines, economic growth. We also ask Congress to pass middle class tax cuts.“

Partisan disagreement over tax cuts for the wealthy has made it difficult for the President, who is leading the negotiations on behalf of Democrats, and the House Speaker, who is taking the lead on behalf of Republicans, to reach agreement on a compromise. Republicans want to extend tax cuts for all income earners while the White House and Democrats want to extend tax cuts only for middle class families earning less than $250,000 annually. If no deal is reached, economists warn that the tax increases and automatic cuts will remove hundreds of billions from the economy and will most likely lead to another recession in 2013. The loss of jobs and economic growth will undoubtedly hurt local communities around the nation.

The White House and Speaker’s office recently made public their proposals to reduce the deficit. The President’s plan calls for a total of $1.95 trillion in savings over the next decade. The plan includes $950 billion from eliminating the Bush era tax cuts on income above $250,000; $600 billion from tax reform; $350 billion from cuts in health entitlements, primarily Medicare; $250 billion from cuts to mandatory spending programs; and $200 billion in new stimulus to boost the economy, including $50 billion for a new infrastructure bank, $120 billion to extend the payroll tax cut, $30 billion to extend unemployment insurance, and $5 billion on bonus depreciation.

House Republicans made a counter offer calling for a total of $2.2 trillion in savings over the next decade. Under their plan, $800 billion would be raised from revenue through tax reform, primarily by closing tax loopholes and limiting deductions for high-income earners; $600 billion from health savings; $300 from other mandatory savings; $200 billion from revision to the Consumer Price Index; and $300 billion from further discretionary savings.

The President and Democrats are insisting that the tax rate be increased for households earning $250,000 annually, while the Speaker and House Republicans are opposed to increasing tax rates for such households. President Obama made clear that offers from the Speaker to close tax loopholes and limit deductions for the wealthy would not be enough. The top tax rate is currently 35 percent. But it was 39.6 percent before the rates were cut. While the President has indicated some willingness to compromise, he is pushing for an increase in the tax rate for top income earners somewhere between 35 percent and 39.6 percent.

The White House is pushing to get a deal completed before the end of the year that will extend middle class tax cuts and then come back after the first of the year and work with Congress to do tax reform in order to find additional savings to further reduce the deficit and put the federal government back on a sound fiscal setting.