Fiscal Cliff Update

With the nation hurtling towards the fiscal cliff, mounting federal debt, the 2001, 2003, and 2010 tax cuts set to expire, the imposition of sequestration and the prospect of hitting the federal debt limit early next year, there seems to be little area of common ground between Democrats and Republicans. Federal Reserve Chairman Ben Bernanke addressed Congress saying, “The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery…Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.”  In addition, Morgan Stanley said this week that concerns about the fiscal cliff are reaching new heights across a wide range of industries. It is already seeing reductions in business orders and hiring, among other areas. Republicans in the House and Senate have said that there is little chance of a grand compromise on taxes and long term debt this year. They recommend that Congress extend all expiring and expired tax provisions for one year to give time for tax reform and comprehensive deficit reduction to take place. In the Senate, Democrats unveiled a tax bill that focuses on enacting much of President Obama’s campaign themes by raising rates on those earning more than $250,000 and increasing dividends and capital gains from 15 to 20 percent.  The dividend increase is actually lower than the 250 percent increase that the president mentioned in a speech earlier this month. The proposal will also increase the estate tax back to a top rate of 55 percent with a million dollar exemption.  In addition, fourth ranking Senate Democrat Patty Murray (D-Wash.) announced in a speech this week that Democrats would rather see the rates go up for everyone than cut a deal with Republicans that doesn’t include separating those making $250,000 and above from the rest of taxpayers. Simpson Bowles, co-author Erskine Bowles, announced a new coalition –the “Campaign to Fix the Debt” – headed up by former Governor Ed Rendell (D-Pa.) and former New Hampshire Senator Judd Gregg (R-N.H.) that includes CEOs of big companies.  The coalition is working on a nationwide media campaign to build public support for the tough decisions that have to be made to deal with the nation’s debt.  The coalition is rewriting the Simpson-Bowles plan to include Medicare and Medicaid reform and other policy changes as a starting point for discussions. AGC has urged Congress to extend all tax policies for one year and work in a bipartisan fashion to deal with comprehensive debt reduction. For more information, please contact Jeff Shoaf at (202) 547-3350 or shoafj@agc.org.