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Fiscal Cliff; avoided, not averted

PWChamber January 11, 2013 Comments Off

After weeks of debate, on Jan 1 Congress voted to avert the “Fiscal Cliff.”   Well, not really.   Rather than truly dealing with the problems they “kicked the can down the road” a little longer.

So, what did Congress do exactly in the Fiscal Cliff deal?  First, more what they didn’t do:

1. They didn’t find a solution to sequestration, the looming spending cuts, half of which come from defense.  Instead, Congress decided to push off finding a solution til a later date. Specifically, two months down the road to early March.

2.  They did not address any substantial spending/entitlement reforms – the driver of our growing debt.

But what they did do:

1. Congress voted to extend unemployment benefits for another year.

2. They indefinitely extended the marginal tax rates (i.e. bush era rates) on annual individual income of up to $400,000 or family income of up to $450,000. The top tax rate (on family income greater than $450,000) now goes up to 39.6%  (from the current 35%). This increase also applies to any business registered as an S-Corporation and files their business taxes as personal taxes.

3. They raised the top capital gains and dividends rates to 20% (up from 15% last year). However, the actual capital gains and dividends tax rate for 2013 actually went up to 23.8%  due to an additional new 3.8 percent tax from the 2010 health-care reform law that took effect on Jan 1.

4. They adopted a 10-year patch for the Alternative Minimum Tax and the medicare “doc-fix”.

5.They allowed the 2% payroll tax cut that went into effect in 2011 to expire, thus increasing taxes on those making $50,000 or greater annually; 77% of American workers.

In the end, according to the Congressional Budget Office (CBO), the “deal” cut only $15 billion in spending while increasing tax revenues by $620 billion—a 41:1 ratio of tax increases to spending cuts.  By comparison, when Presidents Ronald Reagan and George H.W. Bush increased taxes in return for spending cuts—cuts that never ultimately came—they did so at ratios of 1:3 and 1:2. The CBO says the budget agreement will lead to an overall increase in spending of about $330 billion over 10 years.

Here in Northern Virginia, it means continued uncertainty for business owners, particularly those in the federal contracting sector.  This issue, along with diversifying and growing your B2B market, is sure to be a hot topic at our Government Contracting Industry Day on March 8.   We hope that there will be more positive news to report between now and then!

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