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Friday, August 17, 2012

Major Fiscal Issues Before Congress in FY2013

Mindy R. Levit, Coordinator
Analyst in Public Finance

Molly F. Sherlock
Specialist in Public Finance

Jim Hahn
Specialist in Health Care Financing

Janemarie Mulvey
Specialist in Health Care Financing

Julie M. Whittaker
Specialist in Income Security

This report provides a brief overview of the major tax and spending policy changes set to take effect under current law at the end of 2012 or early in 2013. Collectively, these policies have been referred to by some as the “fiscal cliff.” Extending current revenue policies (e.g., extending the Bush tax cuts) and changing current spending policies (e.g., not allowing the BCA sequester to take effect) would increase the projected budget deficit relative to current law. The Congressional Budget Office (CBO) estimates that if current law remains in place, the budget deficit will fall by $502 billion between FY2012 and FY2013.

Revenue provisions that are set to expire at the end of 2012 include the “Bush tax cuts,” as well as provisions related to the estate tax and the Alternative Minimum Tax (AMT). Collectively, the Bush tax cuts reduced income taxes by reducing tax rates, reduced the marriage penalty, repealed limitations on personal exemptions and itemized deductions (PEP and Pease, respectively), expanded refundable credits, and modified education tax incentives. The Bush tax cuts also reduced estate tax liabilities by increasing the amount of an estate exempt from taxation and by lowering the tax rate. The two-percentage-point reduction in the Social Security payroll tax is also set to expire at the end of 2012 and a number of temporary tax provisions (also known as “tax extenders”) expired at the end of 2011 with more scheduled to expire at the end of 2012. Under current law, these provisions are collectively estimated to reduce the budget deficit by nearly $400 billion between FY2012 and FY2013.

There are a variety of spending policies set to change at the end of 2012 or early in 2013. These include the federal share of extended benefit payments for unemployment and the authorization for temporary emergency unemployment benefits. Payments to physicians under Medicare are scheduled to be reduced by 27% in 2013 under the Sustainable Growth Rate (SGR) system. Automatic spending cuts enacted as part of the Budget Control Act of 2011 (BCA; P.L. 112-55) are scheduled to reduce spending beginning in FY2013. Under current law, these policy changes are collectively estimated to reduce the budget deficit by over $100 billion between FY2012 and FY2013.

In making fiscal policy choices, Congress will have to weigh the benefits of deficit reduction against the potential implications of fiscal policy choices for the ongoing economic recovery. Maintaining current revenue and spending policies will add to the deficit, while increasing revenues and reducing spending, as under current law, could slow economic growth. Thus, deficit reduction measures must be balanced against concerns that spending cuts or tax increases could dampen an already weak economic recovery. CBO has concluded that allowing current law fiscal policies to take effect will dampen short-term economic growth, but accelerate long-term economic growth. Conversely, CBO has concluded that postponing the fiscal restraint would accelerate short-term economic growth, but dampen long-term economic growth. In that context, several policy observers have recommended implementing a credible medium-term plan that balances economic considerations with deficit reduction.

Date of Report: August 10, 2012
Number of Pages: 21
Order Number: R42654
Price: $29.95

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