Most would see tax spike unless ‘fiscal cliff’ averted

WASHINGTON – Taking the country over the “fiscal cliff” would cost American households $3,500 in higher taxes next year, on average, if Congress and the White House fail to reach agreement to stop automatic rate changes, according to a report released Monday.

Almost 90 percent of Americans would see their taxes rise through a combination of higher rates on incomes and investments, and the loss of certain tax breaks, including some enacted as part of President Barack Obama’s stimulus program that are set to expire.

The temporary payroll tax break, which has been in place for the past two years to help put more cash in consumers’ pockets to boost the economy, is also set to sunset.

Congress left town for the campaign trail stalemated over tax and spending policy, punting the issue until after the November election, when lawmakers believe voters will provide some policy direction by their choices at the polls.

Republicans and their presidential nominee, Mitt Romney, want to continue most tax breaks, including those for the wealthiest households, and passed legislation in the GOP-controlled House to do so.

Obama and his Democratic allies on Capitol Hill have asked upper-income Americans – those earning more than $250,000 a year for couples or $200,000 a year for single filers – to pay more. The Democrat-controlled Senate approved a bill that would raise rates only on top earners.

Both sides have been unable to come to agreement on the tax issue, which has served as leverage as they negotiate the other component of the so-called “fiscal cliff” – automatic budget cuts that are also scheduled to take place in the new year as part of a deficit-reduction strategy.

The report from the nonpartisan Tax Policy Center warned not all taxes are created equal.

“The components of the fiscal cliff have different effects on households at different income levels,” said the report from the center, which is a joint project of the Urban Institute and Brookings Institution.

The loss of specific tax breaks hits households in different ways. Upper-income earners particularly benefit from the President George W. Bush-era tax rates. If Congress fails to renew the top rates, which expire in December, they would rise to 39 percent, from 35 percent. Rates would also spike on capital gains and dividends, and wealthier Americans would be hit with a new tax under the health care law, which Romney has vowed to repeal.

Wealthier households would see an overall increase of $120,000, on average, in their tax bill, the report said.

Lower-income households tend to benefit more from tax credits for children, earned income and college tuition that were expanded under Obama’s 2009 stimulus. Republicans would prefer to let those expire at year’s end.

Households at the lowest end of the income scale would pay about $400 a year more, the report said.

Overall, the report said, middle-income Americans would see an average $2,000 tax hike, largely from the expiration of those combined tax breaks and others.

Virtually all workers earning $106,000 or less have been benefiting from the two-year payroll tax holiday, which has been providing a break of up to $2,000 a year on the amount paid in Social Security taxes. Congress and the White House used the tax break as a way to boost the sluggish economy by allowing more take-home pay, but are essentially in agreement that the tax should expire Dec. 31.

The report tackled only the tax components of the fiscal cliff, but analysts have warned that although the combination of spending cuts and higher taxes would help reduce the nation’s deficit, they would also operate as a vacuum, taking money out of the economy, and would likely send the country into another recession in 2013.