Posted By David Brousell, November 27, 2012 at 9:09 AM, in Category: Industrial Policy
U.S. federal lawmakers have returned to work to confront the looming “fiscal cliff,” a combination of spending cuts and tax increases that many believe could push the economy into another recession if left unchanged.
To avoid going over this metaphorical cliff, Congress would have to pass new legislation to revise provisions of the Budget Control Act of 2011, which calls for across-the-board cuts in defense and non-defense spending starting in the coming calendar year. Democratic and Republican members of Congress are reportedly in closed-door meetings to try to work out a compromise.
The manufacturing sector has a lot at stake in the negotiations and the eventual outcome. Two prominent manufacturing groups, the ManufacturersAlliance/MAPI and the National Association of Manufacturers, have warned that unless the automatic spending cuts and tax increases are somehow addressed, the U.S. will sink back into recession in 2013.
[The Manufacturing Leadership Council will hold a special teleconference on Thursday, December 6 at 2 p.m. EST to discuss the fiscal cliff issue and devise recommendations. Click here for details.]
In an October report, NAM said that uncertainty regarding federal taxes and revenue has already had a dampening effect on the U.S. economy. The report, prepared for NAM by the Interindustry Forecasting Project (Inforum) at the University of Maryland, projects that this uncertainty has resulted in a 0.6% loss in gross domestic product in 2012.
Furthermore, the NAM report, titled “Fiscal Shock: America’s Economic Crisis,” claims that if the cliff is not avoided, more than 6 million jobs will be lost over the next three years, resulting in an 11% unemployment rate. The report also says there will be a cumulative 12.8% drop in GDP and a 10% loss in household income. These projections are based on the LIFT modeling technique, a 97-sector model of the U.S. economy that compares a baseline forecast of moderate economic growth without a dramatic fiscal contraction with an alternative scenario, under which the fiscal cliff is not avoided and the spending cuts and tax increases occur.
Simulations aside, significant changes will go into effect if Congress and the Obama Administration don’t reach an agreement. According to the Council on Foreign Relations, here’s the expected impact on taxes and revenue:
- 2001/2003/2010 Tax Cuts & AMT Patch. This series of legislation, often referred to collectively as the "Bush tax cuts," will expire on December 31, 2012, raising all income tax rates (the top rate will go from to 39.6% from 35%), as well as rates on estate and capital gains taxes. The alternative minimum tax (AMT) will also automatically apply to millions more citizens.
- Payroll Tax Cut. The Social Security payroll tax holiday will expire December 31, raising the rate to 6.2% from 4.2%.
- Other Provisions. Several other policies, such as the Research and Experimentation Tax Credit, many of which are typically enacted retroactively, are due to sunset at year’s end.
- Affordable Care Act Taxes. Some provisions in the Obama healthcare legislation, including increased tax rates on high-income earners, are set to take effect in January 2013.
- Budget Control Act. The automatic spending cuts, or sequester, legislated by the Budget Control Act of 2011 will hit on January 2. Half of the scheduled annual cuts ($109 billion per year from 2013 through 2021) will come directly from the defense budget; half from non-defense. However, some 70% of mandatory spending will be exempt.
- Extended Unemployment Benefits. The eligibility to begin receiving federal unemployment benefits, last extended in February, will expire at year's end.
- Medicare "DocFix." The rates at which Medicare pays physicians will decrease nearly 30% on December 31.
Whether or not you believe the specific simulations from the NAM’s report, the current situation over federal policy can affect the level of confidence manufacturers feel about their business prospects. Investments in new plants, modernizing existing ones, hiring, and even training all hinge on that confidence.
To ensure that your voice is heard in this important debate, request your invitation to the Manufacturing Leadership Council’s special teleconference on the fiscal cliff, Thursday, December 6 at 2 p.m. EST. Manufacturing’s importance to the economy could not be greater.
Written by David Brousell
Global Vice President, General Manager and Editorial Director of the Manufacturing Leadership Council