Fiscal cliff losers: Rich, poor and everyone else

BY WAYNE GREENE World Senior Writer
Friday, December 28, 2012
12/28/12 at 7:20 AM

It's hard to find any winners on the other side of the fiscal cliff.

If Republican congressional leaders and the White House cannot unwind the Gordian knot of automatic tax increases, automatic spending cuts and attendant decay in the nation's credit, everyone loses.

But how much you lose and why depends on the details of how you earn your income and, in some cases, luck.

Here's a look at 10 categories facing the biggest potential hits:

Working-poor families: People who have come to depend on the refundable Earned Income Tax Credit and federal child-care credits would lose that tax-time bonus, although they wouldn't feel the hit until they file their taxes in April. More immediately, they would see their payroll taxes increase on Jan. 1. That would be one of the smaller potential hits - 2 percentage points - but it would hit those who could afford it the least.

The working rich: Tax rates for people earning at the top end of the scale would go up immediately. According to a paper written by two Lynchburg College professors, the top marginal effective tax rate on wages in Oklahoma would go from 40.7 percent to 47.1 percent.

On taxable interest, the rate goes from 38.4 percent to 47.8 percent. The increase is especially heavy on qualified dividends - rising from 18.4 percent to 47.8 percent. On capital gains, the increase is from 18.4 percent to 28.2 percent. Sole proprietorships, partnerships and S corporations also would see a substantial increase in top-end tax rates at the same time.

Tax-deductible charities: Wealthy donors have less incentive to reduce their tax liability for 2013 if tax rates are going up Jan. 1. On the other hand, fewer of their donations may be deductible after if Congress resolves the problem by lowering rates and broadening the tax base.

Nonexempt federally funded programs:Social Security is relatively exempt from automatic funding cuts, but anything funded through the Pentagon faces a disproportionate impact.

"The arbitrary, across-the-board spending cuts to domestic programs scheduled to take effect Jan. 2 will be added on top of four straight years of cuts at the local, state and federal levels, including $1 trillion in cuts authorized by Congress in recent years," Marnie Taylor, president and CEO of the Oklahoma Center for Nonprofits, recently said.

Nonprofits that rely on Head Start and Medicare funding would be especially hard hit, Taylor said.

Oklahoma Head Start providers would stand to lose more than $7.6 million if the country goes over the fiscal cliff, she said.

One possible solution to the problem would turn the issue back on Social Security recipients by reducing their future cost-of-living adjustments to account for inflation-produced buyer decisions, i.e. when the price of beef rises, consumers buy more chicken.

Everyone: If relative confidence in U.S. federal debt slips - as might be signaled by a change in the bond ratings of U.S. government borrowing - the cost of momentum rises substantially. In other words, if the investors in federal debt start to lose confidence in the ability of the government to service that debt, they will insist on a higher interest rate, which drives up the cost of servicing the debt without any new program revenue.

People captured by the Alternative Minimum Tax: The alternative minimum tax potentially will have the biggest impact on the largest number of taxpayers, said Donald Marron of The Urban Institute.

The current structure of the individual Alternative Minimum Tax dates from the 1986 Tax Reform Act and was designed to ensure that high-income earners paid a minimum level of taxes. But because the threshold for who has to pay the tax is not indexed for inflation, the number of filers who could be subject to the tax has grown to include middle-income earners. Congress has not permanently corrected this, but since 2001, it has repeatedly put a "patch" on the Alternative Minimum Tax that temporarily increased the amount of income exempt from the tax to prevent too many taxpayers from having to pay it.

"Unless something is done, when people file their 2012 returns, the number paying the AMT will go up from 4 million to 32 million, and current AMT payers will see a large jump in their tax liability," Marron said. "Because withholding tables for tax year 2012 assumed an AMT patch, many of those payers will not have withheld enough tax or made sufficient estimated payments during 2012, so they will have a big and unexpected payment due on April 15 if the patch is not extended. And many of these are middle-income taxpayers, who will be hit by the AMT because they live in high-tax states or have lots of kids."

Medicare physicians and their patients: The Obama administration notified more than 1 million physicians Wednesday that their Medicare payment rate would be cut by 27 percent next month if Congress doesn't act to stop it, according to Kaiser Health news.

State income taxpayers: Oklahoma's top marginal income tax rate remains at 5.3 percent, according to the Lynchburg College professors, but that liability rises as the federal income tax liability does.

The state Equalization Board added $60 million into state revenue estimates last week to reflect that impact.

Estate taxpayers: It could make a big tax liability difference is an aging relative dies immediately before midnight Dec. 31 or immediately afterwards.

"Thirty states next year could collect $3 billion more in estate taxes if Congress and President Barack Obama do not act soon," according to an estimate by the Urban-Brookings Tax Policy Center, a Washington think tank quoted by the Chicago Tribune.

The federal estate tax would return with a vengeance and so would a federal credit system that shares a portion of it with the 30 states. They had been getting their cut of this tax revenue stream until the early 2000s, when the credit system for payment of state estate tax went away due to tax cuts enacted under former President George W. Bush.

At the moment, under laws signed a decade ago by Bush, the estate tax is applied to inherited assets at a rate of 35 percent after a $5 million exemption. That means a deceased person can pass on an inheritance of up to $5 million before any tax applies. Inherited wealth passed to a spouse or a federally recognized charity is generally not taxed, according to the Tribune.

Obama wants to raise the rate to 45 percent after a $3.5 million exemption. Republicans have called for complete repeal of the estate tax, which they call the "death tax," although Boehner earlier this month called for freezing the estate tax at its present level. It was difficult to determine what the Republicans want after last week's events in the House.

If Congress and Obama do not act by Dec. 31, numerous Bush-era tax laws will expire, including the one on estate taxes. That would mean the estate tax rate rises to the pre-Bush levels of 55 percent after a $1 million exemption.

People anticipating help from "Obamacare": Five tax increases that take effect Jan. 1 are part of the Affordable Care Act, and three of those will hit the middle class.

"Obamacare" taxes hit everything from dividends and capital gains to day care and services for special needs children. If Congress and the president ultimately decide to turn back those taxes, the programs funded with them also would be in jeopardy.

Wayne Greene 918-581-8308
wayne.greene@tulsaworld.com

Associated Images:

President Barack Obama, accompanied by House Speaker John Boehner of Ohio, speaking to reporters in the Roosevelt Room of the White House in Washington, as he hosted a meeting of the bipartisan, bicameral leadership of Congress to discuss the deficit and economy in Washington. CAROLYN KASTER/AP Photo