Cliff Compromise Could Help Economy, Cost Taxpayers

Posted: January 1, 2013
Published in: St. Louis Post Dispatch
Author: Tim Logan

The deal that was ironed out in Congress over nearly 24 hours Tuesday to resolve the so-called "fiscal cliff" should put the economy in St. Louis, and the nation as a whole, on sounder footing, local economists said.

But probably only for a little while. And your paycheck may suggest otherwise.

The agreement, which the Senate approved in the wee hours of Tuesday morning and the House OK'd as the night drew to a close, would forestall the mix of tax increases and spending cuts that was set to take effect this week, threatening to tip the U.S. back into a recession. If as expected it is signed by President Barack Obama, the deal will raise income and estate taxes on the wealthiest Americans and prolong several popular tax credits.

But it also will end a tax break that's been in place since 2010 that saves the typical family in St. Louis more than $1,000 a year.

The deal spells the end of the "payroll tax holiday," a 2 percentage point reduction in Social Security taxes that was enacted in 2010 to help stave off the recession. As a result, about 77 percent of households nationwide will see their taxes go up this year, according to estimates by the nonpartisan Tax Policy Center. For a family earning the median household income in St. Louis of $51,000, that translates to an extra $1,020 in taxes this year.

So while the fiscal cliff deal will lend some much-needed stability to the economy, said Jack Strauss, an economics professor at St. Louis University, it also could dampen growth, as families have less to spend.

"Incomes have been stagnant or declining for most people," Strauss said. "Now they're going to take this out. A lot of people really can't afford the decrease in their after-tax paycheck."

Other short-term recession-fighting measures survived in the deal, though, including an extension of unemployment benefits, popular tax breaks for children and college tuition and a five-year extension of a credit for the working poor. Several business tax credits were prolonged, too.

"This bill seems to have something for everybody," said Benjamin Ola Akande, dean of the business school at Webster University.

And Akande was hopeful it would have enough to boost confidence in an economic recovery that's been struggling for years to gain traction. Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis, said he, too, thought the deal would ease the minds of investors and executives, at least in the short run.

"This deal is a short-term fix that would prevent a recession in 2013 but is not a grand bargain that would solve many of the long-term debt and deficit problems," Thayer said.

And you can expect those problems will flare up again pretty quickly.

The agreement passed Tuesday merely punts on "sequestration," the massive across-the-board cuts in both defense and domestic federal spending that were part of the August 2011 agreement that created the "fiscal cliff" to begin with. Those cuts could hit hard in St. Louis, where huge employers ranging from Boeing Co. to Washington University Medical School have warned they could lead to furloughs, layoffs and other cutbacks here.

The cliff deal put a two-month stop on those cuts, meaning they'll now come due at the end of February, around the same time the U.S. Treasury is due to run out of money again, likely prompting another vote to increase the federal debt ceiling, which is what led to the creation of the "fiscal cliff" in the first place.

Indeed, Tuesday, even as lawmakers and economists talked about this deal, they were already pointing toward the next round of this seemingly endless fight over federal spending.

"Hopefully this is the last time in 2013 that we're going to have this discussion," said Strauss. "But it's not likely."