Thursday, October 23, 2014

The Fiscal Cliff and You

12/07/2012

Having grown up in hilly Menifee County, Kentucky, I am no stranger to cliffs and have always appreciated the view from a good overhang.  

However, the new appreciation for “fiscal cliffs” in Washington, D.C., has me wondering whether policymakers are becoming too comfortable pushing others to the brink.  

And it has me thinking about what would happen to rural communities if the edge of the cliff is reached — and then passed over.

The fiscal cliff refers to January 1, 2013, when automatic government program cuts will occur and various tax credits and lower tax rates will expire. The combined effect is expected to be a return to higher unemployment rates and a double-dip recession.  

These two events (spending cuts and tax increases) are set to occur in law, so the only way to avoid sending our economy over the cliff is to change the law, which involves the House, Senate and President coming to an agreement.

As expected, the differing political sides have different views on the best way to avoid the cliff. Many Republicans have drawn a line in the sand on increasing tax rates for those earning more than $250,000, which Democrats favor.  Many Democrats have drawn a line in the sand on making changes to entitlement spending (Social Security and Medicare) as part of the deal, a goal  of Republicans. Both positions may be more posturing than real since few people believe we can reduce the debt in any substantial way without increasing revenue and changing the biggest components of our spending.

What may be more troubling though is the group of people who are acquiring the name “cliff-divers” due to their stated belief that the cliff is more like a hill, a slope, or some other topographical feature more characteristic of the Plains states than Central Appalachia. If that position is a negotiating tactic to force the other side to give more, then part of me accepts that; however, generally it is better if all sides understand and attest to the magnitude of a problem before trying to fix it.

Contained within this broader debate are questions regarding the effect of the cuts on specific programs.  

For example, many rural development programs (rural housing, electric, and community facilities) lose 8.2% of their budgets under the automatic cut.  

You have probably driven by a sign in a rural community with the USDA logo about upcoming construction or renovation.  These programs build libraries, lay pipe for new water systems, help build new houses, and support many other projects that mean that rural communities have a higher quality of life; they also mean jobs for the people working on those projects.  Under an automatic budget cut set to occur on January 1, less funding is available for those types of projects.

With tax changes, everyone earning some income would feel some pain and those who have received an extension of their unemployment benefits would see that go away as well. However, while higher income households will pay more in taxes if we go over the cliff, lower income households may have more difficulty making ends meet once their tax burden increases.  

The median household income in 2010 in Kentucky was $41,576, with 97.9% of households making less than $200,000 a year.  According to the Wall Street Journal, a working couple earning $25,000 a year would end up paying $1,423 in additional taxes if we go over the cliff. Tax breaks for education and child tax credits evaporate as well.   

Going over the cliff seems drastic and avoidable. Veering away from the cliff will mean hard choices and shared pain. However, if those hardships and pain result in a more sustainable economic future, then they are justified and necessary. We will all have to accept some willingness to walk away from lines drawn in the sand rather than spending our time redrawing lines in fresh cement.

Aleta Botts is a native of Menifee County, Kentucky. She is a "recovering" policy staffer in Washington, D.C., who is currently  Agricultural Policy Outreach Director for the University of Kentucky. She also works with the Kentucky Center for Agriculture and Rural Development to help producers and rural businesses find funding opportunities. Her opinions are her own, not those of the center or the university.