Everything you wanted to know (didn't you?) about the impending fiscal cliff
What is it? A combination of tax increases (mostly due to expiring tax cuts) and federal spending cuts that could significantly impact the economy (and not in a good way!).
When does it hit? Beginning Jan. 1, 2013—unless we manage to avoid it.
How do we avoid it? Congress and the White House could make a deal.
What's the negosh? Republicans want spending cuts and reforms to costly entitlement programs (Social Security, Medicare and Medicaid). Democrats want the tax cuts to expire for the wealthiest Americans, and to make sure the debt ceiling gets raised again in early 2013. Almost nobody wants the "sequestration"—a set of big, scary, across-the-board federal spending cuts. A deal will likely involve some combination of tax increases, spending cuts and maybe some outliers (entitlement reform, debt ceiling deal, etc.) Some of the more likely options:
1) Avoid the cliff by making a deal before the end of the year.
2) Go over the cliff, let the tax cuts expire, and then reinstate them in early 2013.
3) Just extend the cliff by making temporary deals.
4) Make a "grand bargain" by involving entitlement reform, the debt ceiling and/or some other miscellaneous issues in the negotiations.
Will they make a deal? If we knew that, we'd be geniuses. As of press time, Republican House Speaker John Boehner and President Barack Obama looked sort of like they might negotiate…maybe.
What It Means for New Mexico
Because of New Mexico's reliance on federal funding (for national labs, military bases and entitlement programs), we have high stakes in how this thing shakes out. Gov. Susana Martinez predicts that New Mexico will be "one of the biggest losers" if no deal is struck. But hey, maybe we'll get a reality show.
Jobs: The University of New Mexico's Bureau of Business and Economic Research estimates that New Mexico could lose approximately 20,700 jobs if we go over the fiscal cliff, or 2-3 percent of the state's total workforce. Other estimates are even higher, and even if we avoid the cliff, New Mexico may continue to experience anemic job growth. (Click here to read more about the jobs impact for New Mexico.)
Labs: Around 5,400 of those job losses will occur at New Mexico's national labs, BBER predicts—meaning close to one-quarter of employees at Sandia and Los Alamos may have to find other work if the sequestration (the big, scary budget cut) occurs.
Taxes: Oh yeah, and your taxes might go up. The tax portion of the fiscal cliff includes a bunch of cuts (thanks, George W Bush!) set to expire at the end of this year—including things like the child tax credit. Remember how Obama extended unemployment benefits as part of the stimulus? That's expiring, too. Worst-case scenario, you're out of a job, unable to get unemployment and paying higher taxes. And even if you don't lose your job, the expiration of the payroll tax holiday may mean less take-home pay. In other words, it'll look a little like the end of the world.
Social programs: Certain programs for low-income people are exempt from the sequestration, but Medicare isn't: The sequestration calls for a 2 percent decrease in Medicare payments to health-care providers. That could mean big job losses in New Mexico's health sector. New Mexico Voices for Children also estimates that federal funding for education, health and jobs programs will decrease by $41 million in 2013. This could mean more job losses, and NMVC estimates that "in 2013 alone, 1,800 fewer New Mexico children will be served" by childcare and education programs for low-income families. A "grand bargain" (see above) may be a way to avoid that, but it may also include some changes to Medicaid and Social Security.
What You Can Do
We'd like to go on-record as saying that we really don't think the worst-case scenario's going to happen. That said, no reason not to prepare for it—so SFR asked John Wheir, a tax attorney with the local Modrall Sperling office, for some advice, in addition to offering some of our own unsolicited pearls. Visit SFReporter.com to hear the full interview.
1. Give generously. Currently, property transfers under $3.5 million (for individuals; $7 million for couples) are exempt from the gift tax, Wheir explains, but if we go over the cliff, that may change. Looking for a recipient? We at SFR are always open to seven-figure windfalls.
2. Sell your best stocks. "Some people are selling stock that has substantial appreciation in it...to take advantage of the lower capital gains rate," Wheir notes. Don't have stocks? See below.
3. Update your résumé. (It's good practice, at the very least.)
4. Hide some yuan under your mattress. Seriously.
5. Learn to swim. Never know what's at the bottom of that cliff.