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Action Alert

The Fiscal Cliff Averted (for Now)

One United States Dollar Bill

Round Two of the Fight Approaches

Congress’ actions have prevented the initial collision of tax hikes and spending cuts that created the fiscal cliff, but the war over the U.S. deficit and budget is still being waged in the halls of Congress.

As the year began, President Obama engaged with leaders in the House and Senate to come up with a plan that nearly all senators and a majority of congressional representatives were able to agree to. By working together, they implemented permanent and temporary changes to tax rates, allowing many middle- and lower-income Americans to be able to continue to pay the lower tax rates they have been paying since the inception of the Bush tax cuts. They further avoided the fiscal cliff by pushing back the implementation of mandatory spending cuts until March. Congress’ actions have prevented the initial collision of tax hikes and spending cuts that created the fiscal cliff, but the war over the U.S. deficit and budget is still being waged in the halls of Congress.

The tax deal that was passed addressed the income half of the debate. The tax brackets that were implemented under President George W. Bush were made permanent, save for the income brackets beginning at $400,000 for single filers or $450,000 for joint filers. For these high-income earners, tax rates were raised to Clinton-era levels. The increase in tax rates was a victory for both parties.

The deal also addressed many other tax issues, most of which affect high-income earners. Tax rates for capital gains and dividends were raised from 15 percent to 20 percent for high-income earners; previous capital gains and dividend rates remain the same for everyone with taxable income less than $400,000/450,000. Both the personal exemptions phaseout, which involves the exemptions that are allowed, and itemized deduction limits will apply to upper-income earners, with the phaseouts and itemized deduction limitations beginning at $250,000/$300,000.

Even though only the highest tax bracket have seen an increase, all wage earners have seen a reduction in take-home pay beginning with the first paychecks of 2013 due to the expiration of the payroll tax holiday. This deal did not raise payroll taxes but, by allowing the holiday to expire, wage earners are now paying the rates they were paying in 2010. The increase is felt by workers seeing a return to 6.2 percent of income being paid to the fund, instead of 4.2 percent. For the average U.S. wage earner, this change amounts to an additional $1,000 every year.

As a further show of support to low- and middle-wage earners, many tax credits that were due to expire have been temporarily extended, including the Child Care Credit, the Earned Income Tax Credit, and the American Opportunity Tax Credit. The Child Tax Credit was permanently set at the increased level of $1,000 per child, with the refundable portion extended until 2017. The alternative minimum tax (AMT) was permanently adjusted for inflation, without which more than 30 million taxpayers would have been paying more in taxes. The federal unemployment benefits will also be extended, giving millions of long-term unemployed individuals continued assistance while they look for work in the current economic climate.

Rather than finalize a single deal that addressed all the components of the fiscal cliff, Congress chose to push back the mandatory budget cuts to March, giving them additional time to come up with a better solution to the deficit. But this new deadline will correspond with the need to increase the debt ceiling in February. If Congress does not address the Budget Control Act by the end of March, the cuts that would cause a devastating reduction to many social programs will go into effect.

Programs and services related to the Violence Against Women Act (VAWA) will not close because it was not reauthorized, but they are certainly threatened because budget crises at the local, state and national levels are always looming. While the deal on the fiscal cliff delayed harmful across-the-board cuts to the federal programs until early March, our analysis shows nearly 200,000 victims of violence would lose services if another agreement were not made.

Given the toxic partisan environment, reaching agreement on the budget will not be easy. The president is taking a proactive approach to addressing both possible budget cuts and the debt ceiling debate. He has stated that raising the debt ceiling is imperative, and the White House will not entertain any negotiations that prevent the United States from meeting all of its obligations.

Republican leadership has vowed that they will not accept any deal that does not abide by the Boehner rule: a cut in spending by a dollar for every dollar increase in the debt ceiling. With the two sides sitting at opposite ends of the table, both claiming to have the support of the American people, it is important for every representative to hear from his or her constituents about what truly is important.

The country has passed a major hurdle for now, but the spending cliff will still need to be discussed for longer-term solutions. If you live in a state where your congressional representatives chose to not vote for the measure, write and express your hope for future bipartisan collaboration in the face of budget talks. 

Fiscal Cliff #2: What’s at Stake?

  • The cost of continuing favorable tax treatment of hedge fund managers OR the cost of avoiding sequestration-level cuts for housing vouchers and Women, Infants and Children (WIC). Savings: $21 billion over 10 years.
  • Two V-22 Osprey helicopters OR provide low-cost childcare to 22,000 children. Cost: $156 million.
  • Reduce the corporate tax rate to 28 percent OR preserve refundable tax credits for 13 million families nationwide.

Action: What can you do?

On Meet the Press on December 2, 2012, Senator Claire McCaskill of Missouri noted that the fiscal cliff decisions must address all “three legs of the stool—Entitlements, Cuts, and Revenues—in a way that makes sense … and there has to be money in all legs of the stool.” How and where would you allocate money in each leg of the stool to reach a compromise and fix America’s financial health?

  • Convene a discussion, and write a letter to your congressional representative outlining your views on what can and cannot be bargained.
  • Let your congressional representative know you support efforts to make sure that any budget deal made will not create more poverty or income inequality in America.
  • H.R. 6411: Inclusive Prosperity Act: We could save more than $110 billion just by eliminating wasteful subsidies to oil and gas companies. The Inclusive Prosperity Act would raise hundreds of billions of dollars just by taxing Wall Street trades by a fraction of 1 percent. Please call your congressional representative and ask him or her to support H.R. 6411.
  • Read Resolution 4111, “Enabling Support for Domestic Programs,” in United States Economic Issues (pp. 610–617) and Paragraph 163, Part IV. The Economic Community, “The Social Principles” (p. 535), of The Book of Resolutions of The United Methodist Church, 2008, for guidance and calls to action on elections and politics.


Last Updated: 04/07/2014

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