Fiscal Cliff: Most Mercer Island Families Will Pay $7,830 More With No Agreement

Congress and President Obama are racing against the clock this week as they make one last attempt to hammer out a deal to avoid the so-called “fiscal cliff” the U.S. government is set to go over on New Year’s Day.

On Jan. 1, most tax cuts enacted since 2001 will expire, raising taxes on nearly all Americans. In addition, $1.2 trillion in spending cuts to defense and government programs will go into effect.

Consumers will feel the difference immediately with the expiration of the Bush-era tax cuts and a temporary stimulus tax cut passed by Pres. Obama in 2009. The Tax Policy Center, a non-partisan group, estimates middle-class households would see an increase of almost $2,000 in federal taxes, or about $75 per bi-weekly paycheck (report attached to the right of this story, click on PDF image to review).

Mercer Island households will pay more on average than other communities because it has one of the highest median incomes in the state, according to the U.S. Census bureau. The estimated median income of a Mercer Island household is $146,476, meaning half earn more than that, and half less — and places a large majority of local families in the top 10 percent of income earners nationwide. If the tax cuts expire, according to the same report, most Mercer Island families will pay an average of $7,830 more than last year — roughly a 5 percent increase on marginal tax rates.

A bulk of the increase for Islanders would come from the expiration of the temporary stimulus cut in Social Security taxes and the expiration of the 2001/2003 tax cuts, while many other upper-income families will be required to pay higher taxes as a result of lower tax brackets now falling under the provisions of the Alternative Minimum Tax (AMT) formula.

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Following a , “For them to be burdened unnecessarily because Democrats and Republicans aren’t coming together to solve this problem gives you a sense of the costs involved in very personal terms. … Obviously, it would also have an impact on our economy, because if this family has a couple of thousand dollars less to spend, that translates into $200 billion of less consumer spending next year. And that’s bad for businesses large and small. It’s bad for our economy. It means less folks are being hired, and we can be back in a downward spiral instead of the kind of virtuous cycle that we want to see."

Without a compromise deal to lower the deficit, the government will face a self-imposed deadline that triggers both spending cuts and higher taxes. Congress itself set the Jan. 1 deadline after failing to come to a budget compromise earlier this year. Some have suggested the Fiscal Cliff is a "manufactured crisis" that Congress can undo any time it wishes through retroactive tax cuts. But households must now budget for the likely possibility that any such deal could be reached by April 15, when income taxes must be paid.

While speaking to the Arlington, VA Chamber of Commerce this month, NBC Chief White House Correspondent Chuck Todd said one challenge to finding a compromise to avert the fiscal cliff is that neither President Barack Obama nor Republican House Speaker John Boehner was willing to own the entitlement reform component that would be necessary to avoid the cliff.

In addition, Todd blamed gerrymandering when he said House Republicans are too far to the right and Senate Democrats are too far to the left. Members in those districts can — and usually do — win on party-line platforms.

"If you want to say what's broken in this process, that's what's broken: There isn't a reward for compromise," Todd said.

The week before Christmas, it looked like a deal was possible, as President Obama and Congressional leaders were just a few hundred million away in taxes and spending.  

But Congress recessed the Friday before Christmas after Speaker of the House Republican John Boehner failed Thursday evening to pass his “Plan B,” which would have extended tax cuts for most Americans and raised taxes on those making more than $1 million. Earlier in the day, the House did pass a bill that moved billions in cuts to defense spending to other areas of government spending, including entitlements and programs for lower-income Americans. President Obama said he would veto that bill should it reach his desk.

Last Thursday evening, Boehner said in a statement, “The House did not take up the tax measure today because it did not have sufficient support from our members to pass. Now it is up to the president to work with Senator (Harry) Reid on legislation to avert the fiscal cliff."

In response, the White House released a brief statement: “The President’s main priority is to ensure that taxes don’t go up on 98 percent of Americans and 97 percent of small businesses in just a few short days. The President will work with Congress to get this done and we are hopeful that we will be able to find a bipartisan solution quickly that protects the middle class and our economy.”

What going over the cliff actually means for the recovering U.S. economy is still up for debate among economists and political analysts.

The cliff is more of a slope in terms of the timeline for spending cuts—they take effect over the next decade—but the still-recovering jobs market will take a hit and the combination of higher taxes and spending cuts by the government and businesses could send the economy back into recession, some economists predict.

In the meantime, executives in the defense industry and CEOs of companies large and small are having difficulty budgeting for next year as uncertainty remains about both tax rates and cuts in government spending.