The US Fiscal Cliff - Political Theater has become Economic Reality

The US Fiscal Cliff

Political Theater has become Economic Reality

The US Fiscal Cliff has arrived and as a real estate and banking professional I want to ensure that my fellow professionals understand what it is, why it is happening and what the consequences are for their clients. Real Estate and lending professionals must be prepared to explain to their clients what is happening if they are their trusted advisors.  Real estate or lending professionals cannot give legal advice and should not give tax advice or investment advice.   The best advice they can give is to advise their clients to consult with a licensed professional in all areas of law, taxes and even investments.  Competence in this area of government economics as a real estate and or lending professional is essential.  Here are some talking points.

The US fiscal cliff is a dramatic political term for the description of the economic effects, or in this case the economic mayhem that will arise due to the increasing taxes and spending cuts along with the reduction in the US budget deficit that starts today.  The US deficit is the difference between the total revenue collected and the total spending expected.  The deficit will decrease almost in half with an increase in taxes and decrease in spending of the government. The sharp cut in the deficit in such a short period is the Fiscal Cliff. These cuts will weigh heavily on the economy.   

As of now we are over the cliff.  If changes do not occur before the first business day of 2013, serious effects will hit the economy, including pushing it back into recession. The laws that  changed at midnight on New Year’s Eve  include:

•  Ending of rebates  that provided business breaks,
• Implementation of certain new taxes  introduced by President Obama relating to the health care law,
• Shifting to Alternative Minimum Taxes; which takes the largest share of the effects, and
• Ending of the impermanent payroll related tax cut 

Along with aborting of rebates, and the introduction of several new taxes, the government’s spending cuts will take effect as a component of the 2011 debt ceiling deal which will bring in effect slicing of expenses in over 1000 different programs by the Government. These programs include sensitive areas such as the Defense Budget and Medicare. These sensitive areas are predicted to endure deep cuts in allocations that will automatically take place tomorrow.  Current negoiations call for the sequestering of these sensitive areas for the next two months. 

The fiscal cliff will have a serious impact on moderate to low income families. Though the expiration of all tax cuts introduced in the Bush Era will affect the Federal income taxes for all income levels, low level to moderate income families are the ones that will be most affected. The law introduces removing many key items such as the 2% payroll tax cut, the Alternative Minimum Taxes (AMT) and the extended unemployment insurance benefits. All of these programs are vital for economically susceptible families. To top it off, the US budget will decrease by $100 billion in spending cuts.  The spending cuts and the tax increases will result in the US economy enduring a financial blow of $500 billion dollars.  This is almost 4% of GDP.

The only option to overcome the hazardous affects of the fiscal cliff on the country’s economy is to strike a balance between the tax revenues and the spending cuts, of which the Republicans and Democrats cannot find common ground.  The speaker of the House of Representatives, John Boehner presented a Plan B to work in place of the already designed Fiscal cliff which addressed levying of taxes on incomes more than a $1,000,000 in place of the $400,000 already proposed. So far it looks like $400,000 is the compromised number.  $400,000 in annual income represents only 1% of Americans.  President Obama would like number to be closer to $250,000,  but it is a battle he cannot win at least now and the President and Congress are out of time.    

We have a President that has nothing to lose other than a lower approval rating and Republicans who seem willing to go over the cliff for a Political and philosophical victory.   Unfortunately, to the world Republicans and Democrats look irresponsible for allowing time to expire, and now must face the possibility of defaulting on US debts.  The Republicans will lose everything they are trying to hold on to and Democrats will be crying about significant reductions in entitlements because they both are blind by politics and can no longer see “The People” they serve in this debate. 

The solution to this crisis is straightforward and is achieved every day in most households in the US.  We must find the balance between spending and revenue. The lesser the revenue side, the more the spending cuts. The critical aspect of the issue is that increasing the taxes bears severe results on the low income families, whereas increasing the spending cut also involves programs that are crucial to lower income communities and families, thus affecting them again. These programs include cutting in Medicaid, Food stamps and health coverage through new Affordable Care Act.  We need a path that will bear minimum effect on these income groups. Other income groups will also see the effects on their earnings with a decrease in net income.

The immediate effects of the fiscal cliff will have a negative impact on the economy.  We will survive it, but it may take two to three quarters of the year to get back on track to a revived economy.    Low income groups will immediately feel the loss of the payroll tax.  The effects of AMT will start after filing the 2013 tax form in April.  The people demand a mutually agreed upon and solid compromise to overcome the worsening effects of the Fiscal cliff.  This compromise must include designing tax increases and spending cuts in a way where the least possible effects can be endured by the economy.

Nobody knows the full impact the fiscal cliff will have, but it is here.  We have run out of time.  I cannot believe it!  Political theater has become economic reality.    Congress and the President are working to design a path that can lead us out of this economic turbulence.  I hope they succeed but what a terrible way to start the New Year.  This unfortunately may have killed Big Mo and scared Lady Luck away for the New Year.   Someone once said, “how you start the Year is an indication of how you will end the year”.   We have a tradition in my family to start off the New Year with a pot black eyed peas and Louisana Gumbo for good luck.  I need to go into my cultural and family archives and see what else I can find to ward off this evil that is upon us.

What should real estate agents advise their clients to do to avoid the harsh effects of fiscal cliff?

• Consult with a CPA prior to engaging in any purchase transaction.  Have a clear picture of the effects of fiscal cliff on your personal finances.
•  Stay aware of government policies and laws.  Many changes are happening in 2013.  Know how they will affect your finances the most and what can be done to avoid them to any possible extent. 
• All financial decisions should be put on hold until the fiscal cliff, Mortgage Interest deduction and the deficit negotiation are finalized (I know this is not what anybody in sales want to hear).
• Review all debt and credit lines.  They may be affected by the potential decrease in income due to a decrease economic demand. 
• Look for other sources of revenue through diversification that will contribute to your income in order to  bear the effects of fiscal cliff in the easiest possible way.

I know that many of these recommendations are easier said than done.  I also know that no one in sales wants  to say to their client to wait.  This is where we are as trusted advisors.  We must be objective and provide sound advice.  It  is my hope that the future is brighter than it looks, but this is where I am in my understanding of the state of the Union.

The opinions express in this message are my own and do not represent the opinions of PrimeLending, the OC Realtist, the National Association of Real Estate Brokers or any affiliate.   Please direct all questions or  comments to me at   eric.frazier@thepowerisnow.com.