By Jeffrey Stone
When Congress reached a “fiscal cliff”
compromise with the passage of the
American Taxpayer Relief Act of 2012, they
effectively extended many of the Bush Era
tax cuts that were set to expire at the close
of the year.
For business owners, and most American
taxpayers, this was good news. The not so
good news: this legislation does not address
either the national debt ceiling or the mandatory
spending cuts imposed by the Budget
Control Act of 2011.
Unfortunately, this grab-the-good now and table-the-bad-for-later approach to governing is not doing a lot to build confidence in the economy. Nor does the continued partisan politics of Washington suggest that a unified approach to developing a plan to reduce the federal deficit is within reach.
The result is that business owners are left with several unanswered questions that will ultimately keep them from investing with enough confidence to drive strong economic growth.
The impact of the “fiscal cliff” compromise If we look past what Congress did not do–address spending cuts–and focus on what was done, we can see the compromise does a number of good things for businesses, including:
• Only raising the tax rate on couples earning $450,000 or more and on individuals earning at least $400,000. This is a higher threshold than originally proposed and will spare many small business owners from having to pay higher taxes.
However, the expiration of the Social Security payroll tax means taxpayers will have less disposable income than they did in 2012, as the tax rate has increased from 4.2 percent to the former level of 6.2 percent.
This increase essentially offsets much of the annual growth of income households have experienced the last few years. Considering that sluggish consumer spending has been a primary reason for the slow recovery, it is natural for business owners to fear that less take home pay for their customers will translate to reduced revenues. While the U.S. continues to struggle through the mature phase of the economic cycle with very weak economic growth, the chances of a recession seem much lower than they were in 2012. The emerging economies of the world have also taken steps to improve growth. In addition, even though Europe is still unsettled, the leading indicators in that region suggest Europe may stabilize as some of its countries show improved growth.
On the surface, prospects for business are good. As 2012 closed, consumer sentiment improved and was tilting toward an environment that favored faster spending growth. However, household budgets remain pressured by limited income growth, and despite the decline in gas prices, consumers continue to be concerned about rising costs.
Also, 77 percent of Americans will be affected by the increase in the payroll tax. The impact of this increase remains to be seen. However, for many households, which out of necessity are already operating from paycheck to paycheck, this loss of income is significant–a direct hit to their budget. In addition, small businesses continue to struggle with the cost of the Affordable Care Act and other new government regulations that became settled when President Obama secured his re-election. As a result, businesses are worried about costs becoming higher than projected. Consequently, businesses will probably not invest more than is needed to satisfy current demands. Another barrier to the aggressive investment from businesses that would spur stronger economic growth is the deficit crisis. The American Taxpayer Relief Act of 2012 provided only a small down payment on the government’s $1 trillion annual deficit, which means our political leaders still need to compromise on reductions and revenue as they enter into debt ceiling negotiations.
Many businesses probably suspect that their tax rates may still go higher. Recent comments out of Washington, D.C., have done little to ease this concern. And if there is one thing we know for certain, the market does not act favorably when faced with uncertainty.
Even with uncertainty, the economic outlook is positive.
The provisions from the “fiscal cliff” legislation and unsettled deficit concerns will provide at least a modest drag on the U.S. economy. However, GDP is growing, overseas economies are improving, reports out of emerging markets are promising and equities should achieve decent gains in 2013. Washington will also deal with the deficit crisis–at the eleventh hour.
Overall, the economic outlook for 2013 is more favorable than it was in 2012. Still, much hinges on what will happen in Washington in the coming months. So businesses and analyst are right to be only cautiously optimistic. Greater confidence will come with increased market certainties.
Jeff Stone is president of KeyBank’s Capital Region. His office is at 66 South Pearl St. in Albany, and he may be reached at 257-8643 or Jeffrey.Stone@keybank.com