After the election, and possibly even before the presidential inauguration on Jan. 21, the first issue Congress will have to deal with is a series of tax increases and spending cuts set to go into effect all at once on Jan. 1 that economic analysts believe would throw the economy back into recession.
Congressman John Tierney, D-Salem, and Richard Tisei, his Republican challenger, sketched out the broad outlines of what kind of deal they would find acceptable in what could turn into another rancorous fight in Washington over the federal government’s fiscal and spending policies.
Tierney said he supported modest reductions in spending, including at the Pentagon, along with higher taxes for the wealthy and a reduction in corporate and farm subsidies. Tisei said he supported targeted spending cuts as well, saying the military budget could be trimmed some and Medicare would have to change to survive. But he would not go along with higher rates.
Members of both parties have been jockeying for their policy priorities, with Democrats drawing a line by insisting the tax rate at the top bracket revert back to 39.6 percent, and Republicans digging in on their refusal to allow any tax rates to increase and pushing for sharp cuts to non-defense spending.
Tierney said he wanted a budget compromise to be “balanced,” meaning the federal deficit is reduced by both spending cuts and tax increases. Tisei said he would not support an increase in any tax rates, but would be open to an overall increase in tax revenue if it came through closing some deductions and expenditures in a revision of the tax code.
“If it raises revenue that way, I wouldn’t lose sleep,” Tisei, the Wakefield Republican and former state Senate minority leader said, adding that any increased revenue cannot go toward “new spending.”
“We have to figure out a different way to deliver services,” he said.
He has not signed a “no new taxes” pledge that many other Republicans around the country have. “It ties everyone up in knots,” he said.
But, he said rates should not increase and the myriad deductions, exemptions and credits in the tax code need to be examined and reformed.
Tierney is in line with much of his party in that he advocates letting the tax rate for the highest earners rise to 39.6 percent. “We would not extend the Bush tax cuts for those making over $250,000,” he said.
Both candidates said they support one of the largest deductions in the tax code – the mortgage interest deduction.
Tierney said that one, along with the health insurance deduction for employers, should not be touched. “You have to be willing to discuss everything, but loopholes that we should not touch are the contributions to employee’s health care and the mortgage deduction,” Tierney said. “There are plenty of places to look.”
Tisei said he supported the mortgage interest deduction, but said it “still needs to be looked at. I don’t think the intent is for yachts or for vacation homes.”
Tierney said that all spending and tax ideas in a budget deal should be on the table, and pointed to a proposal written by House colleague Chris Van Hollen, D-Maryland.
That plan would have replaced the automatic spending cuts with reductions or repeals of some tax breaks and corporate and farm subsidies.
Van Hollen’s plan also proposed changing Medicare’s payment system to health care providers by moving away from fee-for-service and toward a set payment for the “quality of care.”
“We will have to look at military budget, but not in sequestration,” Tierney said, referring to the automatic cuts. “You get the Joint Chiefs of Staff and the Secretary of Defense together. We’ve already cut $1.2 trillion in discretionary spending (in the budget bill last summer). It has to be balanced across the board.”
Tisei agreed that the spending cuts set to take effect Jan. 1 are not ideal, but said spending could be reduced in many programs with a thoughtful and targeted approach. He compared the budget to a cut of beef. “A lot of people think you can just chop off fat from one side,” he said. “But that fat is marbled through the meat.”
Tisei said he did not support Congressman Paul Ryan’s proposed budget, which envisioned transforming Medicare into a program with optional vouchers to buy private insurance or to buy back into Medicare and proposed deep cuts to most federal spending and taxes, but insisted the conversation has to start somewhere.
He would not back any changes to Medicare that affects people age 55 or older. “But under that, we deserve to have a program in place and we have to recognize that it won’t be the same plan,” he said.
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The Fiscal Cliff Taxes Rates will revert to what they were in 2001: The lowest bracket (up to $8,900 of taxable income for individuals and $17,800 for married couples) will disappear, effectively raising the rate on that income from 10 to 15 percent; the next bracket (from $8,901 to $36,150 for individuals and $17,801 to $60,350 for married couples) will stay at 15 percent; the next brackets will increase from 25 to 28 percent, from 28 to 31 percent and from 33 to 36 percent, and the highest will rise from 35 to 39.4 percent. That will start Jan. 1 and could affect paychecks immediately because it will change the withholding schedule on paychecks. The capital gains, which are profits on assets held at least one year, tax rate will go from 15 to 20 percent, and dividends, which are the portions of profit paid out to shareholders, will be taxed at the same rate as ordinary working income, rather than at the current special 15 percent rate. The estate tax exemption will fall to $1 million, down from $5 million now, and the rate will be 55 percent, up from 35 percent now. The payroll tax withholding for Social Security, which was cut 2 percent on the employee side (not the employer side) as part of a December 2010 budget deal, will revert to 6.2 percent. A new tax created by the Affordable Care Act of 2010 on high-income taxpayers of 0.9 percent on income over $250,000 for married couples and $200,000 for individuals is scheduled to go into effect on Jan. 1. Spending Most defense spending will be cut 9.4 percent, while non-defense spending excluding Social Security, Medicare and Medicaid, will be cut 8.2 percent. Medicare will be cut 2 percent, mostly through a sharp reduction in the payment rate to doctors and health care providers, and Social Security, veterans benefits, military personnel costs, Medicaid and funding for state Children's Health Insurance Programs would be exempt from cuts. Leaders from both sides of the aisle, and from the Pentagon, have said the spending cuts are too blunt and do not take into account which programs can function with such a reduction and which cannot. There is also concern that a steep reduction in Medicare payments to physicians and other providers would force some doctors to stop accepting Medicare patients. Effect Individuals The Tax Policy Center, a joint venture of the nonpartisan think tanks Urban Institute and Brookings Institute, estimates the effect on middle-income families would be a total tax increase of $2,000 in 2013. The provisions that would most impact the middle class would be the change in the Social Security withholding back to 6.2 percent and the marginal tax rate increases. Deficit The budget deficit is projected to decrease by between $536 billion and $560 billion, from $1.1 trillion in fiscal year 2012 to about $650 billion in fiscal 2013, a drop from about 7.3 percent of GDP (estimated to be $15 trillion) in 2012 to about 4.3 percent in 2013. (Sources: Congressional Budget Office, Tax Policy Center)