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Wednesday, Dec 12, 2012 10:15 PM UTC

Why it’s so hard to step back from ‘fiscal cliff’

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Topics: From the Wires,

Why it's so hard to step back from 'fiscal cliff'(Credit: AP Photo/J. Scott Applewhite)

WASHINGTON (AP) — The “fiscal cliff” crisis bundles together some of Washington’s toughest decisions — the ones lawmakers have dodged for years — and says settle them all right now. Or else. Yet bedrock differences between Democrats and Republicans stand in the way.

No wonder it’s hard to shake hands on a deal by New Year’s.

Failure is a lousy option, nonetheless. It would jeopardize the U.S. economy and reverberate around the world. Here’s a look at the hazards of the fiscal cliff and why it’s so tricky for Congress and President Barack Obama to find a safe way down:

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UNLUCKY 2013

Partly by fate, partly by design, some scary fiscal forces come together in January unless Congress acts to stop them. They include:

— Some $536 billion in tax increases in 2013, touching nearly all Americans. George W. Bush-era income tax cuts are set to expire. So is a temporary Social Security tax cut, and several 2009 tax breaks designed to stimulate the economy by aiding low- and middle-income families. The alternative minimum tax would expand to catch more taxpayers. Taxes on investments would rise, too. More deaths would be covered by the estate tax. Some corporate tax breaks would end.

— About $110 billion in indiscriminate cuts in federal spending next year. By law, the cuts must be divided evenly between the military and non-defense spending, including Medicare, although some programs for the poor would be exempted. That means cuts of almost 8 to 10 percent across all departments, from agriculture to law enforcement to veterans affairs. Plus, federal spending on emergency assistance for the long-term jobless would run out.

All that happening at one time is what’s called going over the “fiscal cliff.”

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HOW BAD WOULD IT BE?

Taxes would jump about $2,000 for a middle income family, 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 see notable cuts in some government services; federal workers would be laid off, and companies would lose government business.

The double whammy would push the nation back into recession and cost up to 3.4 million jobs, the Congressional Budget Office predicts.

It wouldn’t happen all at once on Jan. 1. The effects would deepen over the course of the year.

If the year-end deadline passes, the new Congress might still reach a compromise in the early weeks of 2013 to end the crisis and reverse some of the tax increases and spending cuts.

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CAN’T THEY JUST SAY NO?

Congress and Obama could call the whole thing off, by extending the tax cuts and overturning the automatic spending reductions.

But that would leave the United States heading toward an even bigger precipice: a national debt crisis.

Obama and congressional leaders — especially the Republicans — say it’s time to get serious about fixing budget deficits that have been hitting more than $1 trillion per year. If nothing is done, the U.S. eventually will be overwhelmed by its debt.

Indeed, the automatic spending cuts set for January were created as a last-ditch effort to force Congress to deal with the deficit problem.

Even if lawmakers agreed to whistle past the problem this time, another showdown would loom early in the year.

The government is again approaching its borrowing limit, and needs a vote of Congress to raise it. House Speaker John Boehner says Republicans won’t go along with that unless the increase is matched by spending cuts. Failing to raise the debt ceiling could lead to a first-ever U.S. default that would roil the stock and bond markets.

So Democrats and Republicans really need to make a deal.

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DO THEY AGREE ON ANYTHING?

Neither side wants middle class tax rates to go up. And neither wants the chaotic, across-the-board budget cuts that come with the “fiscal cliff.”

They also agree something must be done eventually to whittle the nation’s debt, and that will mean budget restraints in addition to slowing the growth of entitlement programs such as Medicare.

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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. Most House Republicans oppose raising anyone’s tax rates. Some Republicans say they’re willing to consider limiting some tax deductions or credits, however.

Republicans insist on deeper budget-cutting than Democrats. 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.

Meanwhile, Obama wants $200 billion in new 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, split their differences and go home for the holidays, right?

But there’s a reason neither side wants to give ground. They represent a divided and inconsistent America. True, Obama just won re-election. But voters also chose a Republican majority in the House.

In a nation of red states and blue states, Republican and Democrats alike believe they are doing what their voters back home want.

Neither side has a clear advantage in public opinion. In an AP-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 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.

Raising taxes and cutting government services is never easy.

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THE BRIGHT SIDE

There is a silver lining. Honest. The “fiscal cliff” furor makes this the best chance in a long time to really tackle the $16 trillion national debt.

Obama and Congress have tried and failed over and again to seriously attack budget deficits hitting about $1 trillion per year. This time, the stakes are so high that Washington may finally make some painful choices to head off a long-term crisis.

If the dealmakers can ease in those changes without jeopardizing the shaky economic recovery, Federal Reserve Chairman Ben Bernanke says the nation’s prospects will look brighter in the new year.

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Associated Press writer Jim Kuhnhenn and Director of Polling Jennifer Agiesta contributed to this report.

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Follow Connie Cass on Twitter: http://www.twitter.com/ConnieCass

More By Connie Cass.

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