Over the Fiscal Cliff: Soft or Hard Landing?

By: Associated Press
By: Associated Press

WASHINGTON -- The Senate on Tuesday approved a bill to prevent the nation from going over a Jan. 1 "fiscal cliff." The legislation is now in the hands of the House, which is expected to vote on it Tuesday or Wednesday; if the House approves, it would go to the White House for President Barack Obama's signature.

A look at why it's so hard for Republicans and Democrats to compromise on urgent matters of taxes and spending, and what happens if they fail:

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NEW YEAR'S HEADACHE

Partly by fate, partly by design, some scary fiscal forces are coming together at the start of 2013 unless Congress and Obama act to stop them. They include:

- Some $536 billion in tax increases, touching nearly all Americans, because various federal tax cuts and breaks expired at year's end. The bulk of those are increases the Senate-passed bill is designed to avert.

- About $110 billion in spending cuts divided equally between the military and most other federal departments. That's about 8 percent of their annual budgets, 9 percent for the Pentagon.

Hitting the national economy with that double whammy of tax increases and spending cuts is what's called going over the "fiscal cliff." If allowed to unfold over 2013, it would lead to recession, a big jump in unemployment and financial market turmoil, economists predict. Which makes the pending House vote so crucial.

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WHAT IF THEY MISS THE DEADLINE?

Even if the House rejects the Senate bill, the nation shouldn't plunge onto the shoals of recession immediately. There still might be time to engineer a soft landing.

So long as lawmakers and the president appear to be working toward agreement, the tax hikes and spending cuts could mostly be held at bay for a few weeks. Then they could be repealed retroactively once a deal was reached.

The big wild cards are the stock market and the nation's financial confidence: Would traders start to panic if Washington appeared unable to reach accord? Would worried consumers and businesses sharply reduce their spending? The stock market shot higher Monday as investors bet that Republicans and Democrats would reach an 11th-hour compromise.

Federal Reserve Chairman Ben Bernanke has warned lawmakers that the economy is already suffering from the uncertainty and they shouldn't risk making it worse.

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WHAT IF THEY NEVER AGREE?

If the legislation dies in the House, 2013 looks like a rocky year.

Taxes would jump $2,400 on average for families with incomes of $50,000 to $75,000, according to a study by the nonpartisan Tax Policy Center. Because consumers would get less of their paychecks to spend, businesses and jobs would suffer.

At the same time, Americans would feel cuts in government services; some federal workers would be furloughed or laid off and companies would lose government business. The nation would lose up to 3.4 million jobs, the Congressional Budget Office predicts.

"The consequences of that would be felt by everybody," Bernanke says.

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THE TAXES

Much of the disagreement surrounds the George W. Bush-era income tax cuts, and whether those rates should be allowed to rise for the nation's wealthiest taxpayers. Both political parties say they want to protect the middle class from tax increases.

Several tax breaks begun in 2009 to stimulate the economy by aiding low- and middle-income families were also set to expire Jan. 1. The alternative minimum tax would expand to catch 28 million more taxpayers, with an average increase of $3,700 a year. Taxes on investments would rise, too. More deaths would be covered by the federal estate tax, and the rate climbs from 35 percent to 55 percent. Some corporate tax breaks would end.

The temporary Social Security payroll tax cut has also expired. The Senate bill does not continue that tax break.

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THE SPENDING

If the nation goes over the fiscal cliff, budget cuts of 8 percent or 9 percent would hit most of the federal government, touching all sorts of things from agriculture to law enforcement and the military to weather forecasting. A few areas, such as Social Security benefits, Veterans Affairs and some programs for the poor, are exempt.

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CALL THE WHOLE THING OFF?

In theory, Congress and Obama could just say no to the fiscal cliff, by extending all the tax cuts and overturning the automatic spending reductions in current law. But both Republicans and Democrats agree it's time to take steps to put the nation on a path away from a future of crippling debt.

Indeed, the automatic spending cuts set for January were created as a last-ditch effort to force Congress to deal with the debt problem.

The next crisis is just around the corner, in late February or early March, when the government is expected to reach a $16.4 trillion ceiling on the amount of money it can borrow.

Boehner says Republicans won't go along with raising the limit on government borrowing unless the increase is matched by spending cuts to help attack the long-term debt problem. Failing to raise the debt ceiling could lead to a first-ever U.S. default that would roil the financial markets and shake worldwide confidence in the United States.

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IT'S NOT JUST WASHINGTON

Seems like they could just make nice, shake hands and split their differences, right?

But there's a reason neither side wants to give ground. The two parties represent a divided and inconsistent America. True, Obama just won re-election. But voters also chose a Republican majority in the House.

Republicans and Democrats alike say they are doing what the voters back home want.

Neither side has a clear advantage in public opinion. In an Associated Press-GfK poll, 43 percent said they trust the Democrats more to manage the federal budget deficit and 40 percent preferred the Republicans. There's a similar split on who's more trusted with taxes.

About half of Americans support higher taxes for the wealthy, the poll says, and about 10 percent want tax increases all around. Still, almost half say cutting government services, not raising taxes, should be the main focus of lawmakers as they try to balance the budget.

When asked about specific budget cuts being discussed in Washington, few Americans express support for them.

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THE COUNTDOWN

Time for deal-making has been short, thanks to the holiday and congressional calendars. The current Congress is in session only through noon Eastern time on Jan. 3. After that, a newly elected Congress with 13 new senators and 82 new House members would inherit the problem.


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