By CONNIE CASS
Associated Press
WASHINGTON (AP) - Efforts to save the nation from
going over a year-end "fiscal cliff" were in disarray as lawmakers fled
the Capitol for their Christmas break. "God only knows" how a deal can
be reached now, House Speaker John Boehner declared.
President Barack Obama, on his way out of town
himself, insisted a bargain could still be struck before Dec. 31. "Call
me a hopeless optimist," he said.
A look at why it's so hard for Republicans and
Democrats to compromise on urgent matters of taxes and spending, and
what happens if they fail to meet their deadline:
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NEW YEAR'S HEADACHE
Partly by fate, partly by design, some scary fiscal
forces come together at the start of 2013 unless Congress and Obama act
to stop them. They include:
- Some $536 billion in tax increases, touching
nearly all Americans, because various federal tax cuts and breaks expire
at year's end.
- About $110 billion in spending cuts divided
equally between the military and most other federal departments. That's
about 8 percent of their annual budgets, 9 percent for the Pentagon.
Hitting the national economy with that double
whammy of tax increases and spending cuts is what's called going over
the "fiscal cliff." If allowed to unfold over 2013, it would lead to
recession, a big jump in unemployment and financial market turmoil,
economists predict.
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WHAT IF THEY MISS THE DEADLINE?
If New Year's Day arrives without a deal, the
nation shouldn't plunge onto the shoals of recession immediately. There
still might be time to engineer a soft landing.
So long as lawmakers and the president appear to be
working toward agreement, the tax hikes and spending cuts could mostly
be held at bay for a few weeks. Then they could be repealed
retroactively once a deal was reached.
The big wild card is the stock market and the
nation's financial confidence: Would traders start to panic if
Washington appeared unable to reach accord? Would worried consumers and
businesses sharply reduce their spending? In what could be a preview,
stock prices around the world dropped Friday after House Republican
leaders' plan for addressing the fiscal cliff collapsed.
Federal Reserve Chairman Ben Bernanke has warned
lawmakers that the economy is already suffering from the uncertainty and
they shouldn't risk making it worse by blowing past their deadline.
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WHAT IF THEY NEVER AGREE?
If negotiations between Obama and Congress collapse completely, 2013 looks like a rocky year.
Taxes would jump $2,400 on average for families
with incomes of $50,000 to $75,000, according to a study by the
non-partisan Tax Policy Center. Because consumers would get less of
their paychecks to spend, businesses and jobs would suffer.
At the same time, Americans would feel cuts in
government services; some federal workers would be furloughed or laid
off, and companies would lose government business. The nation would lose
up to 3.4 million jobs, the Congressional Budget Office predicts.
"The consequences of that would be felt by everybody," Bernanke says.
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THE TAXES
Much of the disagreement surrounds the George W.
Bush-era income tax cuts, and whether those rates should be allowed to
rise for the nation's wealthiest taxpayers. Both political parties say
they want to protect the middle-class from tax increases.
Several tax breaks begun in 2009 to stimulate the
economy by aiding low- and middle-income families are also set to expire
Jan. 1. The alternative minimum tax would expand to catch 28 million
more taxpayers, with an average increase of $3,700 a year. Taxes on
investments would rise, too. More deaths would be covered by the federal
estate tax, and the rate climbs from 35 percent to 55 percent. Some
corporate tax breaks would end.
The temporary Social Security payroll tax cut also
is due to expire. That tax break for most Americans seems likely to end
even if a fiscal cliff deal is reached, now that Obama has backed down
from his call to prolong it as an economic stimulus.
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THE SPENDING
If the nation goes over the fiscal cliff, budget
cuts of 8 percent or 9 percent would hit most of the federal government,
touching all sorts of things from agriculture to law enforcement and
the military to weather forecasting. A few areas, such as Social
Security benefits, Veterans Affairs and some programs for the poor, are
exempt.
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THERE'S MORE AT STAKE
All sorts of stuff could get wrapped up in the fiscal cliff deal-making. A sampling:
- Some 2 million jobless Americans may lose their
federal unemployment aid. Obama wants to continue the benefits extension
as part of the deal; Republicans say it's too costly.
- Social Security recipients might see their checks
grow more slowly. As part of a possible deal, Obama and Republican
leaders want to change the way cost-of-living adjustments are
calculated, which would mean smaller checks over the years for retirees
who get Social Security, veterans' benefits or government pensions.
- The price of milk could double. If Congress
doesn't provide a fix for expiring dairy price supports before Jan. 1,
milk-drinking families could feel the pinch. One scenario is to attach a
farm bill extension to the fiscal cliff legislation - if a compromise
is reached in time.
- Millions of taxpayers who want to file their 2012
returns before mid-March will be held up while they wait to see if
Congress comes through with a deal to stop the alternative minimum tax
from hitting more people.
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CALL THE WHOLE THING OFF?
In theory, Congress and Obama could just say no to
the fiscal cliff, by extending all the tax cuts and overturning the
automatic spending reductions in current law. But both Republicans and
Democrats agree it's time to take steps to put the nation on a path away
from a future of crippling debt.
Indeed, the automatic spending cuts set for January
were created as a last-ditch effort to force Congress to deal with the
debt problem.
If Washington bypassed the fiscal cliff, the next
crisis would be just around the corner, in late February or early March,
when the government reaches a $16.4 trillion ceiling on the amount of
money it can borrow.
Boehner says Republicans won't go along with
raising the limit on government borrowing unless the increase is matched
by spending cuts to help attack the long-term debt problem. Failing to
raise the debt ceiling could lead to a first-ever U.S. default that
would roil the financial markets and shake worldwide confidence in the
United States.
To avoid that scenario, Obama and Boehner are trying to wrap a debt limit agreement into the fiscal cliff negotiations.
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SO WHAT'S THE HOLDUP?
They're at loggerheads over some big questions.
Obama says any deal must include higher taxes for
the wealthiest Americans. Many House Republicans oppose raising anyone's
tax rates. Boehner tried to get the House to vote for higher taxes only
on incomes above $1 million but dropped the effort when it became clear
he didn't have the votes.
Republicans also insist on deeper spending cuts
than Democrats want to make. And they want to bring the nation's
long-term debt under control by significantly curtailing the growth of
Medicare, Medicaid and Social Security - changes that many Democrats
oppose.
Obama, meanwhile, wants more temporary economic
"stimulus" spending to help speed up a sluggish recovery. Republicans
say the nation can't afford it.
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IT'S NOT JUST WASHINGTON
Seems like they could just make nice, shake hands and split their differences, right?
But there's a reason neither side wants to give
ground. The two parties represent a divided and inconsistent America.
True, Obama just won re-election. But voters also chose a Republican
majority in the House.
Republican and Democrats alike say they are doing what the voters back home want.
Neither side has a clear advantage in public
opinion. In an Associated Press-GfK poll, 43 percent said they trust the
Democrats more to manage the federal budget deficit and 40 percent
preferred the Republicans. There's a similar split on who's more trusted
with taxes.
About half of Americans support higher taxes for
the wealthy, the poll says, and about 10 percent want tax increases all
around. Still, almost half say cutting government services, not raising
taxes, should be the main focus of lawmakers as they try to balance the
budget.
When asked about specific budget cuts being discussed in Washington, few Americans express support for them.
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THE COUNTDOWN
Time for deal-making is short, thanks to the holiday and congressional calendars. Some key dates for averting the fiscal cliff:
- Lawmakers aren't expected to return to the
Capitol until Thursday, leaving less than a week to vote on a compromise
before year's end.
- Obama and his family also left town for a
Christmas vacation in Hawaii. The president said because the fiscal
cliff was still unresolved, he would return to Washington this week.
- If lawmakers reach Dec. 31 without a deal, some economists worry that the financial markets might swoon.
- The current Congress is in session only through
noon Eastern time on Jan. 3. After that, a newly elected Congress with
13 new senators and 82 new House members would inherit the problem.
___
Associated Press writers Jim Kuhnhenn, Alan Fram
and Andrew Taylor and Director of Polling Jennifer Agiesta contributed
to this report.
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Follow Connie Cass on Twitter: http://www.twitter.com/ConnieCass
Copyright 2012 The
Associated Press. All rights reserved. This material may not be
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