Fiscal cliff looms large: Taxpayers could feel the pain

If you think all the talk about the impending “fiscal cliff” is nothing more than politics as usual in Washington, D.C., you may be in for a rude awakening.

That’s because if the federal government fails to act to steer clear of the impending crisis, millions of Americans will find themselves dealing with a cruel surprise when they prepare their 2012 income tax return. And the demographics of the West County area make it a location where the impact will be especially pronounced.

But the consequences don’t end there. Failure to deal with the federal spending and overall tax issues that comprise the fiscal cliff will have “drastic and immediate” consequences for virtually everyone in this nation. Due to the ripple effects of activity in the U.S. economy – the world’s largest – what happens in America also will affect the economies of other countries around the globe.

Dr. Grant Black, an economics professor and director of the Center for Entrepreneurship and Economic Education at the University of Missouri-St. Louis, and John Niemann, a certified public accountant and business consultant whose Niemann & Co. practice is in Creve Coeur, weighed in on fiscal cliff issues in recent interviews.

First, some background. The fiscal cliff was created by Congress last year when ideological purity among Democrats and Republicans trumped any agreement on how to address the growing federal budget deficit.

Lawmakers, in effect, said, “We can’t agree on anything now, but we definitely will … later on. The end of next year (wink, nod, nudge – after the election) would be a good deadline. That gives us plenty of time. What’s more, we’ll assure everyone that we will take action by promising a bunch of Draconian consequences if we don’t. Things like across-the-board federal spending cuts applying to everything from Medicare to defense spending, and the end of the temporary payroll tax cuts and the Bush-era tax cuts, etc.”

What seemed like plenty of time last year has come down to scarcely more than a month before those harsh consequences become reality.

Niemann said he has advised his clients about the impact of tax law issues and automatic federal spending cuts that will kick in if Congress and the Obama administration fail to agree on plans to avert those actions before year-end. However, he predicts millions of Americans will be surprised to learn how they will be affected for the first time by the alternative minimum tax (AMT).

The AMT is not new, Niemann said. It’s a federal income tax dating back more than 40 years. The current version, approved in 1982 but amended many times since then, requires individuals and other taxable entities to pay tax on regular taxable income or on income computed under AMT provisions. Whichever tax liability is greater is the one that must be paid.

The goal of the AMT has been to limit the amount of income a taxpayer could exclude from tax due to various tax preferences. Commonly referred to as “loopholes,” these preferences include well known provisions such as personal exemptions, medical expenses, state and local taxes, charitable contributions and miscellaneous other itemized deductions.

“Last year, the AMT applied to about 4 million taxpayers,” Niemann said. “If nothing is done, estimates are the tax will apply to about 33 million taxpayers filing 2012 returns.”

In the past, Congress has approved yearly “patches” designed to raise the income floor at which the AMT applies, thereby reducing the impact of inflation. Absent such action this year, the AMT tax floor could drop from the current $74,450 to its original level of $45,000, Niemann noted.

Even if Congress does act, Niemann predicts challenges for taxpayers.

“The delay already has made things difficult for the IRS and probably will mean that refunds will be slower in coming,” he noted. “With so many tax-related questions still unanswered, any year-end tax planning also is going to be an informed guess at best.”

West County will feel the impact of no action on the AMT more because of its greater percentage of higher income households and the exemptions they often take that would need to be added back in to determine how the AMT applies, Niemann explained.

The Tax Policy Center, which provides independent analyses of tax-related issues, has estimated that among married couples with at least two children and an adjusted gross income in the $75,000-$100,000 range, 84 percent will face a significantly higher tax bill this year because of the AMT if Congress doesn’t act.

Niemann said he is concerned about the economic impact of AMT, as well as other tax law changes that affect virtually all wage earners.

“What drives business growth is demand for products and services, and that demand is driven by the amount of disposable income that people have,” Niemann said.

“The tax changes that could come will reduce disposable income and that undoubtedly will have an adverse effect on business and its ability to grow and create jobs.”

UMSL’s Black strongly agrees, noting that mandated cuts in federal spending also will add to the adverse impact on the economy.

“All of these changes add up to taking $600 billion or more from the economy,” Black said. “Sure, there will be a big cut in the federal deficit but that will come with what I think will be severe economic consequences.”

Black predicted a major decline in economic activity and steep increase in unemployment if Congress doesn’t act.

“We’ve seen a strong interest and push for dramatic changes in federal fiscal policies, but I suspect that when the impact of what we’re looking at now hits home, the picture will be different,” he said.

Black believes delays in dealing with spending and tax issues have and will continue to pose problems of their own. Postponing decisions means that solutions will tend to carry a larger price tag in terms of the severity of their impact, he said.

“We also run a greater risk of a financial crisis down the road,” he said. “If we continue to see a lot of political bickering and stalemate, that too could affect consumer and investor confidence.

“Feelings of uncertainty about the future mean consumers will tend to spend less and businesses will be more unwilling to invest.”

As for what the scenario will be as far as action by legislators is concerned, Black thinks it’s likely lawmakers again will opt for “kicking the can down the road” – making some comparatively easy and temporary fixes now and leaving the knottier and politically charged issues of increasing tax revenues and major spending cuts for later. Based on positions staked out by both political parties thus far, one outcome does seem certain: There will be no shortage of finger-pointing about who’s to blame for anything “bad” that happens.