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Sunday, Apr. 26, 2015

Fiscal cliff could hit some hard

Sunday, December 2, 2012

One phrase you're going to hear a lot about until the end of the year -- and likely thereafter -- is "fiscal cliff."

What is it?

"Fiscal cliff" is the term being used to describe a situation the federal government will confront at the end of December, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Certain budget changes, including changes in tax rates and cuts in federal spending agreed to as part of a deal in 2011 to raise the federal debt ceiling, will take effect automatically unless officials in both parties can agree to make other changes instead.

Local effect

So if it happens, how will this impact local government?

According to Shelbyville city manager Jay Johnson, the city doesn't receive that many direct federal dollars since most of its funding comes through the state government.

However, if the state is forced to reduce its budgets, it could impact the city, such as fewer dollars for road improvement projects. Urban areas generally receive more federal assistance, Johnson said.

Johnson believed that the impact would be felt more heavily in the rural counties like Bedford, saying there could be an effect on social service agencies that receive more direct federal dollars.

Higher burden

County Mayor Eugene Ray said that any cutback in state spending would increase the burden on county government.

"The state is constantly cutting back," Ray said, "but they want the same services -- and the people want the same services."

Counties have few options for replacing lost revenue, Ray noted. Those include raising rates for existing property or sales taxes -- or implementing a wheel tax, but a wheel tax can be challenged and prevented from taking effect by the voters.

2013 changes

A number of laws are set to change at midnight on New Year's Eve, such as the end of last year's temporary payroll tax cuts, meaning a two percent tax hike for workers, as well as the end of certain tax breaks for businesses.

Also set to take effect are changes in the alternative minimum tax, the ending of the 2001-2003 tax cuts and the start of taxes related to President Obama's health care law.

But at the same time, spending cuts agreed on as part of the debt ceiling deal of 2011 will begin to go into effect, which could mean deep, automatic cuts for over 1,000 government programs -- including the defense budget and Medicare.

And since Tennessee is a sales-tax dependent state, some observers say tax hikes on consumer spending will hit us harder than other states.

Taxing issue

If the cliff is "gone over," federal tax increases would result in boosts in capital gains rates from 15 percent to 20 percent, higher income tax rates and elimination of the two percent payroll tax reduction, resulting in fewer dollars in taxpayers' pockets.

Johnson said that if individual tax rates go up, then residents would have less disposable income, and that would "very much impact local sales taxes ... and all the merchants."

"That's a possibility," Johnson said.