In this month’s edition of federal fiscal crisis, Congress shockingly failed to agree on a way to defer, avoid, or reallocate mandatory governmental spending cuts slated to take effect on March 1. Though to be fair, lawmakers have only had two years to deal with the planned cuts, as they were originally put in place during the debt limit crisis of August 2011 as a way to force them to deal with our mounting debt and expanding deficit. The spending reductions were to have taken effect on Jan. 1, but the year-end fiscal cliff negotiations kicked the can down the right, delaying the cuts two months in hopes that an agreement could be reached. As we’ve seen, however, two years is hardly enough time to make headway towards bipartisan agreement in the political logjam that is Capitol Hill.
As a result, nearly $85 billion in mandatory reductions to government spending (formally referred to as sequestration) are now a reality. The inability of Republicans and Democrats to reach a grand bargain will — according to those in the know — deal a blow to the economy, greatly weaken defense programs, and cost nearly 1 million jobs.
To their credit, both parties put up spirited, if largely symbolic, last-minute attempts to stop the sequestration. Both failed to gain traction.
First, the Senate shot down a Democratic bill — the “American Family Economic Protection Act of 2013” — which would have replaced the $85 billion in automatic cuts with a mixture of tax increases and spending reductions. These spending reductions, rather than taking effect immediately as part of sequestration would have been phased in over a 10-year period.
On the tax side, the bill would have adopted the Fair Share Tax, which as I discussed in my last column, would have essentially guaranteed that any taxpayer with adjusted gross income in excess of $2 million would pay an effective federal tax rate of 30 percent. In addition, the bill would have denied tax write-offs for any moving expenses to a U.S. business that relocates offshore.
Notably, however, the Senate Democratic proposal did not seek to close loopholes related to private jets, the oil and gas industry, and the payroll tax burden of S corporation shareholders, as earlier proposed sequestration legislation had.
The bill received only 51 yea votes, nine short of the 60 necessary to move forward. No Republicans voted for the proposal, and four Democrats voted against their own party. Why would liberals do such a thing? Perhaps it had something to do with a report by the Congressional Budget Office stating that the bill would actually increase the deficit over the next decade. Or if you’re slightly more cynical, perhaps it was because three of the four Democratic Senators represent historically red states, and their seats are up for reelection in 2014.
Senate Republicans countered with their own proposal, “A Bill to Provide for a Sequester Replacement.” As you might imagine, Republicans refused to consider any additional tax revenue, and they opted to retain the amount of the scheduled cuts. The bill, however, would have provided the White House with more flexibility to administer the reductions. The bill was rejected by a 62-38 vote.
So here we are.
On Friday, President Obama made one last-ditch effort to avoid sequestration, meeting with Congressional leaders in hopes of hammering out an 11th-hour deal, as if there were any other kind with this Congress. No agreement was reached, however, and thus the president was required by law to issue the order to cut spending by $85 billion staring at midnight on Friday. And while the $42 million in cuts slated to hit the Pentagon have received the bulk of the press, many non-defense federal programs are preparing for drastic changes as well, as the Office of Management and Budget was required to order all federal agencies to cut their budgets by approximately 9 percent.
So how will sequestration affect you?
Expect school construction to slow significantly, because the Treasury Department was forced to take off-line the computers that process payments for the construction work. Payments will thus be delayed while they are made manually for the next six weeks.
At the Department of Housing and Urban Development, officials were forced to notify governors in all 50 states just how much their grants will be reduced in the coming days and weeks. In short, programs that assist with funding — like public rent assistance, farm loans and food programs — will see immediate cuts.
Forced furloughs for government employees will become a reality, though in most cases not for a month or two, after government managers have finished wrestling with the appropriate union leaders. To illustrate the impact of the furloughs, Education Secretary Arne Duncan has stated that teacher layoffs, changes to after-school programs and the cutting of days from the 2013-14 school year will begin in March.
Expect air travel to become more frustrating, if that’s humanly possible. Airport shutdowns and flight cancellations are expected to start in early April.
Unless you’re handy with a bow or run a makeshift slaughterhouse in your basement, a good steak could become harder to come by. Come April, USDA meat inspectors could begin their furloughs, and without inspectors, meat processing factories will be forced to close.
Unemployment checks will drop for the long-term unemployed who receive the federal benefit checks.
And in a potentially damaging blow to the Aspen area, America’s national parks will be in jeopardy of not opening.
And yes, there is no denying that the Pentagon was hit particularly hard, with defense programs cut by 13 percent. Meaning come April, there will be virtually nothing to prevent the King of England from waltzing right through your front door and pushing you around.
Tony J. Nitti, CPA, MST, can be reached at firstname.lastname@example.org.