What Will Happen with the Fiscal Cliff?


The White House/ flickr

Last week I wrote a post called Fiscal Cliff Definition, with a simple explanation of the much-hyped, so-called fiscal cliff. (I also suggested that we call it a "fiscal obstacle course" instead of a cliff, because that's a more appropriate metaphor.) The next important question is: What's going to happen?

While it's anyone's guess exactly what deal Congress and the president will agree on, we do know the major components of negotiations happening right now. The final deal will involve some combination of the following:

Spending Cuts

Currently across-the-board spending cuts are scheduled to reduce funding for the military and nearly every domestic program at the start of 2013. (A couple major items like Social Security and Medicare benefits would be unaffected.) The pending cuts cuts are known in Washington parlance as sequestration, and lawmakers of both parties want to avoid these funding reductions, making it likely that they'll ultimately agree to delay or cancel them.

Bush-Era Tax Cuts

Tax cuts passed under President Bush and extended under President Obama are set to expire at the end of 2012. Democratic lawmakers in general want to extend these tax cuts for families making less than $250,000 annually and let them expire for families making over that mark. Republicans in general support extending the tax cuts for everyone. The disagreement over tax rates for top earners is perhaps the most contentious part of negotiations. Recently, however, there have been some signals that Republicans will agree to extend the tax cuts for the bottom 98 percent of taxpayers without waiting for agreement on tax cuts for the wealthy, with Rep. Tom Cole (R- Okla.) putting his support behind such a proposal.

Limits on Tax Deductions

Many Republicans have offered an alternative plan to raising tax rates on the wealthy. In a proposal supported by GOP presidential nominee Mitt Romney, some Republican lawmakers suggested placing limits on tax deductions in order to raise additional revenue without raising tax rates. (If the phrase "tax deduction" doesn't hold a lot of meaning for you, think, for example, of the deduction for home-mortgage interest.) As we wrote a few months ago in a piece called The Untold Story of Deficits, deductions, credits and loopholes in the tax code divert more than $1 trillion in potential revenue from the U.S. Treasury each year. Some Democrats have also expressed an interest in limiting such deductions, but they have not signaled that they'd accept such a plan in place of allowing the Bush tax cuts to expire for top earners.

Changes to Earned Benefit/Entitlement Programs

Republican lawmakers in particular have asked for changes to earned-benefit programs like Social Security and Medicare; these programs are also known as "entitlements." Proposed changes include limiting cost-of-living increases in Social Security benefits; raising the Medicare eligibility age; and asking wealthy retirees to pay higher premiums for Medicare. President Obama is in favor of such premium increases for wealthy Medicare beneficiaries, but Democrats in general oppose the other changes on the table.

Unemployment Benefits

Federal unemployment benefits expire at the end of 2012, and President Obama wants to extend them. That proposal has gotten little support from Republicans.

Obamacare Taxes

Many Republican lawmakers oppose the Affordable Care Act, the president's health reform law that is also known as Obamacare, and some Republicans are currently asking for the repeal of new taxes included in the legislation.

Farm Bill

Strange though it may seem, the 2012 farm bill may play a role in current budget negotiations. The farm bill is the legislation that authorizes agriculture subsidies as well as nutrition programs like food stamps (also known as SNAP). The House drafted a version of the farm bill that would create budgetary savings of $35 billion in 2013; nearly half of the savings would come from limiting eligibility for food stamps.

The Debt Ceiling

The federal debt is projected to bump up against the debt ceiling in early 2013. In order to prevent a government shutdown and debt default, Congress will have to approve an increase in its borrowing limit. Senate Majority Leader Harry Reid (D- Nev.) has said lawmakers should deal with this issue now to prevent another crisis a month or two down the road.

If that sounds like a lot on the negotiating table, it is. Want to know our predictions for what will happen? Check them out here.