Washington News

Senate Finance Committee Chairman Max Baucus (D-MT) asked the nonpartisan Congressional Budget Office (CBO) to review the impact of the expiration of tax cuts at the end of 2012 and the scheduled budget cuts for 2013. The total of the combined tax increases and budget cuts for 2013 is approximately $700 billion.

The CBO published a report on November 7 with the title "Economic Effects of Policies Contributing to Fiscal Tightening in 2013." In the CBO report, if all of the scheduled tax and budget changes occur, the economic growth for 2013 will be reduced by 0.5% and unemployment will increase from the current 7.9% to 9.1%.

The report shows the specific economic impact of several actions. It explains the change in potential economic growth and the number of jobs that are affected by each respective action.

	Economic Impact in 2013
Tax or Budget Action	Growth Increase	Jobs Increase
1. Extend tax cuts for middle incomes.	1.3%	1,600,000
2. Repeal the budget cuts.	0.8%	800,000
3. Extend 2% payroll tax cut and unemployment ins.	0.7%	800,000
4. Extend upper income tax cuts.	0.1%	200,000

First, extending the tax cuts also includes an estate tax applicable exclusion amount of $5 million plus indexed increases and passing tax extenders such as the IRA charitable rollover. Second, repealing the budget cuts would stop the 2013 sequestration of defense and Medicare funds and restore the scheduled 30% cut in payments to doctors providing Medicare services. The third section would extend the current 2% reduced payroll tax contribution. Finally, the fourth option would extend the current top 35% income tax bracket for single persons over $200,000 and married couples over $250,000 in income.

Chairman Baucus responded to the report and noted, "This report reaffirms the serious economic risk America faces if we fail to deal with the fiscal cliff. The consequences of inaction will deliver a dramatic, short-term blow to the economy. We need to build a bridge over this fiscal cliff."

Chair of the House Ways and Means Committee Dave Camp (R-MI) also reviewed the CBO report. He stated, "There is a better path forward than simply increasing tax rates, and one in which both sides can claim victory. We can address both our jobs crisis and our debt crisis by focusing on tax reform that strengthens the economy. There is bipartisan support for tax reform that closes loopholes and lowers rates."

Finally, Speaker of the House John Boehner (R-OH) opened the door to potential tax increases. In an address on November 7, he stated, "For purposes of forging a bipartisan agreement that begins to solve the problem, we are willing to accept new revenue, under the right conditions."

Editor's Note: Speaker Boehner and President Obama spoke by telephone shortly after the election. Both are making public statements, but exercising caution to preserve flexibility in their negotiations.