WASHINGTON — It was a last-second deal to avoid default and spur political leaders to action.
But 13 months later, taxpayers and businesses in Maine and across the country wait as Congress and the White House negotiate about how to avoid going over the dreaded “fiscal cliff.”
Without some sort of agreement in Washington on reducing the federal deficit, more than $600 billion worth of higher taxes and across-the-board spending cuts will kick in for the coming year on Jan. 1.
Although it’s a manufactured crisis, Mainers will face real consequences if the cuts and tax increases take effect.
Nearly every taxpayer will give a bigger chunk of his or her paycheck to the government. Federal programs that support schools, pay for special education and help low-income Mainers heat their homes or feed their families could lose funding. And thousands of jobs in the defense sector — from shipbuilders to munitions parts suppliers — plus thousands more in other fields could be affected or even disappear.
“If nothing is done, it would put us back below where we were at the depth of the recession (in Maine) in terms of jobs,” said Charles Colgan, an economist at the University of Southern Maine, who believes losses in the range of 6,000 to 10,000 jobs are realistic.
Here are five things Mainers need to know as we head toward the fiscal cliff.
You would pay more taxes. Yes, you.
Much of the partisan debate about how to avoid the cliff has focused on whether to increase taxes on families earning more than $250,000 and individuals making $200,000 or more — an income bracket that applies to fewer than 10,000 Mainers.
But the reality is that, unless Congress acts, virtually every family and individual taxpayer will pay more.
The tax rate for every income bracket will rise between 3 and 13 percent, and a temporary payroll tax reduction will end, resulting in a 2 percent increase.
Additionally, child tax credits would drop from $1,000 to $500, the capital gains tax rate would jump from 15 to 20 percent, and some married couples would go back to paying more as a couple than they would individually, the so-called “marriage penalty.”
Overall, Mainers would pay an additional $1.4 billion in taxes next year as several major tax categories increase, according to an analysis conducted this summer by Maine Revenue Services, the tax arm of state government. That’s a significant tax increase for a state like Maine.
Mainers’ total personal income is estimated at roughly $54 billion, which means the changes in the federal income tax, the payroll tax, the Alternative Minimum Tax and the estate tax would effectively result in a 2.6 percent average reduction in take-home pay statewide.
“So there’s no surprise most economists believe if these cuts went through combined with sequestration that it would put the U.S. economy back into recession,” said Mike Allen, associate commissioner for tax policy. And, he said, Maine’s economy would likely follow suit. “It’s too much all at once.”
How much more you will pay depends largely on how much make.
A Maine “tax family” — which is either an individual or a married couple filing jointly — earning less than roughly $14,250 a year would pay about $262 more a year under the above scenario.
Those earning between $27,300 and $35,200 would see their federal tax bill rise $1,142.
And those with incomes of between $63,000 and $83,800 would pay an additional $2,518, according to the state’s estimates.
And Maine’s top 1 percent? Those earning in excess of roughly $355,000 would have to shell out another $24,800 next year.
Many could lose their jobs
Going over the fiscal cliff would trigger the first round in $1.2 trillion across-the-board spending cuts — also known as “sequestration” — spread over a decade.
Critical defense programs, military personnel, Medicare reimbursements, Social Security benefits and veterans affairs programs would be exempt.
The initial cuts of $110 billion would be evenly divided between defense and non-defense budgets.
Estimated job losses for Maine and nationwide vary widely and are subject to dispute, largely because the budget figures released so far are too general to assess specific programs and because funding will in some cases be gradually reduced instead of evaporating all at once on New Year’s Day.
Colgan has seen job loss estimates for Maine from a few thousand to up to 40,000 — a figure he said would result in an “epic calamity.” Colgan is more comfortable with a figure of about 6,000 job losses, which would still reverse the gains made since the bottom of the recession.
Many of those job losses would likely be from defense contractors.
Under the White House’s rough calculations — not based on actual proposals — next year’s budget for Navy shipbuilding and conversion would plummet $2.1 billion. Those cuts would likely be felt at Bath Iron Works and the Portsmouth Naval Shipyard in Kittery, which together directly employ roughly 10,000 people.
A September jobs study conducted for the Aerospace Industries Association — a trade group — estimated that Maine could lose 2,031 defense-related jobs at small businesses next year, plus another 1,253 jobs outside of the defense sector. An earlier study by the same economist put Maine’s defense-related job losses above 4,000.
Another report by two pro-defense organizations, the Center for Security Policy and the Coalition for the Common Defense, cited the potential for nearly 5,800 job losses in Maine and $239 million in lost earnings.
Gov. Paul LePage cited some of the more pessimistic job-loss figures in a recent letter to President Barack Obama regarding the fiscal cliff.
“Our state’s gross output could shrink more than $348 million,” LePage wrote. “I firmly believe the cost of the federal government should be significantly reduced, but those cuts should be driven by making the hard, necessary decisions to ensure future prosperity, not by Washington’s abdication of responsibility.”
Unemployed face impacts, too
An estimated 6,500 Maine residents would lose their unemployment insurance because temporary eligibility extensions meant to help the long-term unemployed will expire. Jobless Americans will be eligible for unemployment insurance for only 26 weeks, down from the 99 weeks currently allowed.
“If the extension ended tomorrow, those workers would lose that benefit … so their families would take a substantial hit,” said Garrett Martin, executive director of the left-leaning Maine Center for Economic Policy.
Additionally, deep cuts would affect job retraining and workforce development programs used by those struggling to find employment.
“From our perspective, nothing is more important right now than getting people back to work,” Martin said.
K-12 funding cuts loom
A Maine Department of Education analysis estimates that an envisioned 8.2 percent cut would reduce federal funding to Maine schools by nearly $12.1 million, based on fiscal year 2012 numbers.
The two biggest losers would be Title 1 funding, which most Maine public schools receive, and support for special education programs. Both of those areas could lose more than $4 million.
Other potential cuts include Maine’s career and technical education programs ($453,000), after-school learning centers ($464,000), teacher/principal training and recruitment ($923,000) and adult education grants ($154,000).
Maine Department of Education spokesman David Connerty-Marin said much of that money is “flow-through,” meaning it goes directly through the state to local school districts. As a result, it would be largely up to local schools to address the losses, even as they struggle with the expiration of federal stimulus dollars.
“This would be an additional hit that would certainly hurt. There’s no question about it,” he said.
Fallout for higher education
Families sending children to college, meanwhile, would lose access to the American Opportunity Tax Credit of up to $2,500 a year to cover tuition and other educational expenses, including textbooks. That credit would be replaced by the Hope Tax Credit, which is capped at $1,800 and has tighter income restrictions.
Gianna Marrs, director of student aid at the University of Maine in Orono, said the Opportunity Tax Credit especially benefits middle-income families who may earn too much to qualify for financial aid.
Other work-study and need-based grant programs could also see reductions, Marrs said. And while the popular Pell Grants are shielded in 2013, the program would be cut in future years.
University researchers are bracing for impact as well.
“We’ve already started to feel the results of the fiscal cliff,” said Mike Hastings, director of research and sponsored programs at UMaine. “Some of the federal agencies are so concerned about it that they are withholding their solicitations” for grant applications.
The federal government provided roughly 93 percent of the $61.5 million in grants that flowed through Hastings’ office last fiscal year, supporting several hundred faculty and many more graduate students. Those researchers and grad students conduct work that not only can lead to scientific discoveries but also can spawn commercial enterprises — and therefore jobs.
The National Science Foundation, which is one of the biggest sources of federal research funding, is already warning researchers that existing multi-year grants may have to be trimmed if the agency has to absorb an estimated $469 million cut next year.