President Obama and congressional leaders are struggling to come up with a long-term deficit reduction plan to avert the year-end "fiscal cliff" when all of the George W. Bush-era tax rates expire and $1.2 trillion in unpopular spending cuts over a decade are triggered. The combined economic effect of the two could send the U.S. economy back into a recession. A number of other laws, including a payroll tax holiday and unemployment benefits, are also scheduled to expire at the end of the year unless Washington acts. The president and House Speaker John Boehner, R-Ohio, have been unable to bridge the partisan divide over taxes and spending cuts, and Boehner's alternative effort to avert the cliff failed to muster enough GOP support to pass.
Q: Why is it called a "cliff"?
A: The term "fiscal cliff" was coined by U.S. Federal Reserve Chairman Ben Bernanke in testimony before Congress in February. He said "a massive fiscal cliff of large spending cuts and tax increases" would occur Jan. 1, 2013, if Washington didn't act. The phrase caught on, but policy and economic analysts argue that it's more of a "slope" than a "cliff" because it would cause a slow decline that threatens to put the U.S. economy back into recession - but not until the third quarter of 2013, according to economic forecasts. It is unclear how financial markets - which so far have been largely stable during the negotiations - will react if Washington does nothing before Dec. 31.
Q: What happens on Jan. 1?
A: All of the Bush-era tax cuts expire, affecting practically every American household. The non-partisan Tax Policy Center estimates middle-income households would see an average federal tax increase of almost $2,000. At the same time, the onset of $1.2 trillion in spending cuts over the next decade (about $100 billion a year for 10 years) will be triggered because the congressional "super committee" failed last year to come up with specific deficit reduction on its own. The trigger was put in place as an insurance policy to extract spending cuts if Congress failed to act. In 2013, about $50 billion will be cut from defense spending and $50 billion from non-defense discretionary spending, which includes everything from cancer research to law enforcement. The combined tax hikes and spending cuts make up the "fiscal cliff."
Q: Does anything else happen Jan. 1?
A: A number of other laws affecting millions of Americans are set to expire, including a 2% payroll tax holiday under President Obama and extended unemployment benefits for 2.1 million Americans. The alternative minimum tax (AMT) patch also expires, which would make an estimated 26 million taxpayers vulnerable to higher tax rates, according to the Congressional Research Service. A popular package of "tax extenders" affecting businesses, individuals and charitable giving tax laws are also scheduled to expire, as well as the "Medicare doc fix" a short-term patch to avoid a scheduled 26.5% drop in payments to physicians who treat Medicare patients.
Q: When will I start to feel the effects of going off the cliff?
A: If Washington does nothing, almost immediately. Workers would see less money in their first paycheck in 2013, and the long-term unemployed would stop receiving federal benefits. The automatic spending cuts would affect job growth - an estimated 2.1 million job losses will occur in 2013, according to the George Mason University Center of Regional Analysis. Additionally, IRS Commissioner Steven Miller warned Congress last week that if it fails to extend the AMT patch before it expires, 80 million to 100 million taxpayers face problems filing their 2012 income tax returns and the IRS will have to delay processing returns to grapple with new tax laws. Doctors with Medicare patients would see payments drop in February.
Q: If this is such a big deal, why isn't Congress still in Washington?
A: A deal continues to elude Obama and congressional leaders, who sent lawmakers home for the Christmas holiday with an expectation for Congress members to return Dec. 27 to figure out a solution before Dec. 31. The negotiations involve a small number of people - mainly the president, Speaker Boehner, Senate Majority Leader Harry Reid, D-Nev., and their respective staffs. Without a bill to vote on, there's no practical reason to keep lawmakers in town over Christmas while party leaders attempt to find agreement. It may look bad to leave town with a fiscal crisis at hand, but public opinion of this Congress has already been at historic lows.
Q: Are they going to fix it?
A: Probably, but going over the cliff remains a risk until an agreement is reached. There is general consensus that Washington has to act to aid U.S. economic recovery and protect most Americans from a tax hike. For the past two years, a divided Congress and Obama have repeatedly clashed over budgetary issues, including a government shutdown, raising the nation's borrowing authority, and extending the payroll tax holiday. They reached resolutions each time, but the negotiations all went down to the wire. If that precedent holds, Congress could be casting votes as members count down to the new year.
Susan Davis, USA TODAY