Official Washington forecast to be hotly partisan for months to come
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Fiscal-cliff fallout: Ups and downs

Jan. 4, 2013
Bipartisan deal resolved well less than half the battle

It’s what was not addressed by the fiscal-cliff deal passed earlier this week by Congress and signed by President Obama that has experts on the economy worried about what Washington will do next and how quickly Congress and the White House will act to avert yet more uncertainty.

The agreement negotiated by Senate Majority Leader Mitch McConnell (R-KY) and Vice President Joe Biden (D) contains much to cheer low- to middle-income earners. And that may help boost consumer confidence.

The good news for this huge group of taxpayers is the continuance of the Bush-era tax cuts for those earning less than $400,000 and households making less than $450,000; making the Alternative Minimum Tax (AMT) scheme adjust for inflation (preventing millions from having to pay this higher “alternative” income tax); and the extension of unemployment benefits for another year.

On the other hand, the 2% Social Security payroll tax “holiday” was ended and that means middle-income households will pay an additional $2,000 or more in taxes through payroll deduction this year.

“For individual truckers, [the extension of the Bush tax cuts] impacts their personal decisions, but not their business decisions,” Lana Batts, partner at Transport Capital Partners (TCP), told FleetOwner. “They will still be on the sidelines until they see freight start to increase with commensurate increases in rates.  Carriers can still make more money raising rates than adding trucks.”

As for who lost out in general, earners above the $400,000/$450,000 level, will see the top income-tax bracket rise to 39.6% In addition, the tax on capital gains will jump from 15% to 23.8% and the estate-tax rate was increased to 40% with its exemption, currently $5.12 million, now indexed to inflation.

Another positive from the bipartisan agreement is that various tax breaks for business were extended another year, including tax incentives for the use of biodiesel fuel.

Despite everything that was crammed into the fiscal-cliff agreement as it was crafted right up against the calendar deadline, the legislation was derided by many concerned about where the economy is headed as a “small ball” deal because it literally kicked down the road the can known as “sequestration”-- the massive package of automatic federal spending cuts set to kick in this year.

Per the McConnell-Biden deal, sequestration will not even come up before Congress until March 1 and will likely result in a protracted and very partisan fight between the President and Senate Democrats on one side and House Republicans on the other.

What’s more-- and it’s a whopper-- Congress and the President will soon also be engaged in a battle royal over raising the federal debt ceiling.

The upshot is American business executives will be hesitant to make significant investments, including in hiring more people, until Washington sends a definitive signal that these twin threats to economic stability not to mention growth will be dealt with intelligently and quickly.

“The good news is that we did not walk off the cliff,” said Bob Costello, chief economist for the American Trucking Assns. (ATA) in a special report released yesterday. “Had we dove off it for an extended period of time, the economy would have slipped back into a recession.”

On the other hand, he said that since the fiscal-cliff deal did not address federal spending issues outside of postponing the sequester and did not raise the government’s debt ceiling, “we are looking at another [Washington] showdown in a couple of months.”

Therefore, Costello said “motor carriers and allied industries should remain cautious about the near term, as there are still several economic headwinds related to this [fiscal cliff] agreement-- including a steep drop in government spending if the debt ceiling isn’t raised.”

He noted that consumer spending has been slowing recently. “After increasing a robust 7.7% in 2011, personal consumption of goods fell to 4.3% in 2012. At this stage, I only expect a 2.1% gain this year as all households will see an increase in taxes with the payroll tax going [back] up 2%. This measure alone will reduce real, i.e. inflation-adjusted, GDP by about 0.4 percentage points this year.”

What’s more, he pointed out that “higher earners will see the top tax bracket go up, not to mention this group of taxpayers will also see further increases in the payroll tax and a tax on investment income in order to finance the reforms of the Affordable Care Act [also known as Obamacare.]

“Therefore, my 2013 baseline forecast for real GDP has been decreased to 1.8%, down from 2.3% in 2012,” stated Costello.

Still, he pointed out there is a much larger economic impact closing fast-- the political battle over the federal debt ceiling. He said that if this massive issue is not resolved and quickly, it will dwarf what going over the fiscal cliff would have wrought.

“While the debt interest payments will likely take priority [in Washington deal-making], the government will only be able to spend what it receives in revenue,” he elaborated. “As a result, [federal] spending will plummet and the government’s ability to pay its debts will be called into question, thus raising borrowing costs.

“If a [debt-ceiling] deal isn’t struck, it wouldn’t take much to push this economy back into recession,” Costello warned. “Government spending must be reduced, but if the cuts are large and immediate, it will be catastrophic for the economy.”

Chad Stone, chief economist at the Center on Budget and Policy Priorities think tank, wrote in a recent analysis piece that even a “relatively brief implementation” of the spending changes required by current law (sequestration) should cause little short-term damage to the economy as a whole.

“The federal budget is expected to shrink dramatically between 2012 and 2013 if the laws governing revenues and spending remain largely unchanged,” he explained.  “With no action from policymakers, that sharp reduction in the deficit would slow the economy dramatically, likely creating a mild recession in 2013.”

“The fiscal-cliff deal didn't answer the deficit issue,” pointed out TCP’s Batts.  “[Truck operators] are still concerned about the long-range implications of the debt;  expectations of increasing inflation; and FMCSA's never-ending costly regulations, etc.  I'm sure they ‘caught’ the Obama acknowledgement that he was not done raising taxes, but he certainly doesn't intend to reduce spending.  Closing tax loopholes is raising taxes.

“None of this is esoteric for motor carriers,” Batts added. “They understand it is not just partisan bickering in need of a little ‘Kumbaya’ and hand-holding, but deep, deep divides in the basic direction the country should take-- capitalism or creeping French-type Socialism.”

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