Falling off the “fiscal cliff” appears inevitable as Washington lawmakers stand at an impasse, and in a few weeks, as Americans get their first paychecks of 2013, that failure will become evident to everyone’s bottom line.
“It is fair to say very few Americans will feel no effect from the impact from the ‘fiscal cliff’ if we go over it, as this affects a lot of areas of the tax code,” said Patrick McLean, the top Bell administration financial official for the city of Toledo.
“Everybody’s circumstances are different,” Mr. McLean said. “For example, a single person making $40,000 a year in the city of Toledo is going to see their net income drop by about $1,245 a year — and that is your traditional employee who pays into Social Security.”
The so-called cliff is a mix of automatic government spending cuts called sequestration along with tax increases that will take effect in January. It includes the end of extended unemployment benefits for about 65,000 Ohioans — including 2,400 in Lucas County.
The spending cuts to agencies that receive federal money won’t be felt right away because many fiscal budgets run through June 30. Take-home pay for employees nationwide, on the other hand, could be lower within weeks of the new year because of the higher taxes.
A reduction of Social Security taxes from 6.2 percent to 4.2 percent of wages up to $113,700 was put into place as a temporary stimulus measure. Without a deal, Americans who pay that tax will revert to the higher rate.
The IRS has not told companies how much in taxes to withhold for 2013, so the 2012 withholding rates most likely will continue into early January. But paychecks still would be smaller because of the 2 percent increase from the expiration of the Social Security tax cut.
The bottom line on that issue alone could mean someone making $50,000 a year will take home about $83 less every month.
Mr. McLean said municipal workers who don’t pay Social Security taxes won’t feel as much pain as people who do.
“For people who are paying into PERS or SERS, the state of Ohio retirement systems ... they didn’t get the breaks when the taxes were cut, so they won’t feel the pain when taxes are increased,” he said. “There are other things worth noting, in some of these changes, for example, a portion of the marriage penalty will return.”
People benefiting from a child credit or the dependent care credit will also see that end-of-year tax deduction reduced.
According to the payroll services company ADP, plunging over the “fiscal cliff” also means several pieces of federal legislation are at risk, including the ‘doc-fix’ that would prevent a 30 percent cut in Medicare physician reimbursement rates; implementation of a number of new taxes under the Affordable Care Act, and $110 billion in across-the-board budget cuts that was agreed to by the President and Congress in 2011. Taxes on long-term capital gains also would increase.
“ADP is closely monitoring the situation as Congress and the administration continue to deliberate possible changes to tax laws that may affect payroll and employment tax administration in 2013,” the company said in a statement. “As we have demonstrated with previous tax-law changes, ADP is well positioned to respond rapidly to late-breaking tax law changes on behalf of clients. In the event that no consensus is reached and the relevant laws remain unchanged, ADP will continue meeting its clients’ payroll needs and will address any federal requirements for modification.”
Michael Urbanski, a Toledo-area certified public accountant with the firm Titus & Urbanski Inc., said if lawmakers do nothing, the lowest taxpayers will start paying taxes at a 15 percent rate instead of the current 10 percent rate.
“The effect on individual tax clients is as different as a fingerprint. Everyone is different so there are certainly ranges that that would apply, but there is no way to put a dollar amount to a [news] story,” Mr. Urbanski said. “But the thing we all need to know is that tax laws have changed multiple times since 2000 and a lot of those changes have been done with the understanding that there was an expiration date and the expiration date was Dec. 31 of 2010 and President Obama extended that two more years.”
Among those who will feel the effect most directly are the more than 65,000 Ohioans receiving federal emergency unemployment compensation, more than 2,400 of them in Lucas County.
“This cutoff will mean harder times for many thousands of Ohioans, and jobless workers in Lucas County in particular,” said Zach Schiller, research director at Policy Matters Ohio. The loss of those dollars ripples throughout the economy.
The average Ohioan receiving unemployment compensation gets about $300 per week, though the exact amount is based on previous wages when they were working and how many dependents they may have, said Ben Johnson, a spokesman for the state Department of Job and Family Services.
People receiving unemployment compensation get 26 weeks of state-funded benefits.
People out of work longer can receive federally funded emergency unemployment for an additional 37 weeks, for a total of 63 weeks of benefits. It is those 37 weeks that will be cut off if no deal is reached.
Unless an agreement is worked out, “the maximum available benefits moving forward will be 26 weeks, instead of 63, or in the not-too-distant past, 99 [weeks],” said Mr. Johnson, referring to benefits available to workers in the most dire circumstances. The average unemployed worker is out of work for 40 weeks, said George Wentworth, a senior staff attorney with the National Employment Law Project.
“The distinguishing feature of this recession is a very high level of long-term unemployment,” Mr. Wentworth said. Of the nation’s 12 million unemployed workers, about 5 million are considered long-term unemployed, and have been looking for work for 27 weeks or longer, he said.
“It has been a very slow recovery,” he said. “Cutting benefits off at 26 weeks is going to push people into dire economic straits."
Contact Ignazio Messina at: email@example.com or 419-724-6171 or on Twitter @IgnazioMessina.
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