Region peers over edge of fiscal cliff
By Teresa Auch Schultz firstname.lastname@example.org December 22, 2012 8:14PM
FOR USE AS DESIRED, YEAR END PHOTOS - FILE - In this Nov. 16, 2012 photo, President Barack Obama, accompanied by House Speaker John Boehner of Ohio, speaks 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. (AP Photo/Carolyn Kaster, File)
Fiscal Cliff Changes
Along with federal spending cuts equaling $110 billion a year, the fiscal cliff on Jan. 1 will also bring severe tax increases and tax credit cuts that will affect most people, including:
Social Security tax: Increase from 4.2 percent to 6.2 percent.
Child Tax Credit: Decrease from $1,000 per child to $500.
Earned Income Tax Credit: Will max out at two children instead of the current three children.
Unemployment benefits: Will end at 26 weeks instead of 63 weeks
Highest tax bracket: Rate will increase from 35 percent to 39.6 percent
Capital gains and dividend taxes: Increase from 15 percent to 20 percent
Updated: January 24, 2013 6:17AM
The country’s upcoming “fiscal cliff” might appear as a far-off threat to many people, but it would likely have a real effect on residents in Northwest Indiana, including those who already struggle economically.
Unless federal lawmakers work out a deal to avert what’s popularly known as the fiscal cliff, on Jan. 1 federal spending will see large cuts, certain tax rates will go up and some tax credits will decrease.
That translates into people in Northwest Indiana seeing their pocketbooks shrink and could also lead them to spend less money, even if just through fear of the unknown, Bala Arshanapalli, professor of finance at Indiana University Northwest, said.
“If you look at these tax increases, people will have less money to spend,” he said.
The one change likely to have the widest and most immediate effect, Arshanapalli said, is the 2 percent increase in the Social Security payroll tax, which would hit anyone whose employer takes the tax out of each paycheck.
The increase would actually take Hoosiers back to what they were paying a few years ago. President Barack Obama included a 2 percent Social Security tax cut, from the original 6.2 percent to 4.2 percent, as part of a broader package to encourage economic recovery.
The return to the original tax rate won’t be new for most people, but it will mean less money in their pockets. The increase would cost someone making $50,000 about another $1,000 a year.
Child Tax Credit
The average person would likely not see other tax increases, Arshanapalli said, but they would get hit from a decrease to several tax credits, including the Child Tax Credit. Right now people get a credit of $1,000 for each child they have, which can be paid back to people as part of a tax return.
However, the fiscal deal called for that amount to be cut to $500 for each child, meaning a family with children would see $1,000 less back from the government each year.
Earned Income Tax Credit
The EITC also helps people with children but focuses more on families who make little money. For the past few years, families could see a greater credit for each child they have for up to three children. Like the Social Security tax, that was changed to help people during the economic recession. But it would revert on Jan. 1 to the original maximum of two children, meaning people with three children or more would not see any more help than families with just two children. For now, the third child can bring a family as much as an extra $700 a year as part of their income tax return. The EITC and other tax credit changes would not take effect until April 2014, when people file for their 2013 taxes.
Right now, people in Indiana can remain on unemployment benefits for 63 weeks, but that is an extension of the normal period of 26 weeks. The fiscal cliff agreement would cut that time back to the original 26 weeks, so anyone who had already gone past that point would lose their unemployment checks.
The poor aren’t the only ones to see less money. The fiscal cliff calls for those in the highest tax bracket, who make more than $250,000, to pay 39.6 percent, versus the current 35 percent, in income taxes. The capital gains tax, which taxes interest made on long-term stocks, will increase from 15 percent to 20 percent. The tax on company dividends will also increase at the same amount as the capital gains tax.
Everyone will feel effects
The overall point, Arshanapalli said, is that no one is free of the fiscal cliff’s reach. Even if people don’t notice a direct effect, or don’t realize what exactly is happening, the fear of the unknown and what it could bring could affect how people behave in general, Micah Pollak, assistant professor of economics at IUN, said.
“There’s the whole psychological effect as well,” Pollak said. “People perceive the government isn’t working properly. Even if you don’t know the detail, the fiscal cliff just sounds terrifying.”
Some people might get scared and stop or slow their spending, he said, which could affect the growth of the economy if enough do so.
Other possible outcomes would trickle down to Northwest Indiana. Janet Snowden, office manager and director for Winfield Township’s food pantry, said that so far people in her area have been generous enough with donations that the pantry has helped everyone who comes to it. However, if people who are already struggling financially lose unemployment benefits and see cuts to their tax credits, more might need to seek help from their local pantry.
“We’ll take care of it as we can,” she said while stocking the pantry’s shelves Wednesday morning.
The pantry already had to move into a bigger space when more people sought help after the economic recession hit a few years ago. Snowden said the number of people from her township seeking assistance has dropped somewhat, but that could change next year.
Congress and the president are working on a deal to avert the fiscal cliff. However, it’s likely some parts of the fiscal cliff will be included in any such deal, and Pollak said he thinks such a deal likely won’t happen until sometime in January after the cuts and increases from the cliff have already happened.
He remains optimistic that a deal will be reached shortly after the new year, however. If that’s so, Pollak said, the government can always make provisions of that deal, including extensions of tax cuts and credits, retroactive to the beginning of the year.
Families brace for hits
Some people are still concerned about such a deal, especially if it includes cuts to Social Security spending. Crown Point resident Christina Woestman lives on her monthly Social Security checks, along with payments from her husband’s pension. If those are capped or cut, she said, she would likely have to find a job. That in turn would mean she couldn’t continue baby-sitting her granddaughter, so Woestman’s daughter, a single parent who would see her own loss of money through cuts to the Child Tax Credit, would have to pay for a baby sitter.
“I don’t know (what will happen),” she said.
Connie Skrundz, of Lowell, said that not only does her husband receive Social Security income, but they also see a significant tax return because of their mortgage. One plan to avert the fiscal cliff is a proposal to stop letting people use their home mortgage as a deduction on their income taxes.
“It’s a bad economy, and things aren’t going up,” she said.
That’s why she wants any outcome to put the burden on those who can afford it.
“I think the rich should pay more, period,” Skrundz said.
David Goldman, of Valparaiso, believes the changes for him will be minimal. He said when he was married and had children, it would have affected him more, but now he’s single and in a lower tax bracket, he would only see the 2 percent from Social Security. He said he has more concerns with everyday expenses.
“Whether it increases one way or another,” Goldman said, “the price of food, gas and rent is a bigger effect than the 2 percent increase. With my limited income, that doesn’t amount to a hill of beans to me.”