With the election over, Congress must now confront several pressing issues. Foremost among those is the "fiscal cliff."
Unless Congress acts, the new year will bring about spending cuts and tax increases that will remove $700 billion from the economy, shaving more than 3 percentage points off economic growth. Economists agree that, if left in place, this perfect storm of policy changes would result in recession. Here is what would happen if the nation goes over the fiscal cliff:
-- The Bush tax cuts will expire, affecting not only individual income tax rates but also capital gains, the estate tax, education tax credits and other credits for low-income families.
-- The current (lower) payroll tax rate will increase and extended unemployment benefits will end, cutting benefits for some 500,000 Californians.
-- Many business tax breaks will end, including the R&D tax credit and accelerated depreciation.
-- Medicare payment rates to doctors will plummet by nearly 30 percent, jeopardizing health care for seniors.
-- Millions more families will fall under the Alternative Minimum Tax, raising their tax burden.
-- A series of across-the-board cuts will take effect, slashing federal spending by $1.2 trillion over 10 years ($109 billion in 2013) and endangering more than 2 million jobs next year.
California would be hit especially hard. A study by Professor Stephen Fuller at George Mason University shows that these cuts would cost California 230,000 jobs - 135,000 from the defense industry and 95,000 from non-defense sectors.
Yet, indefinitely delaying spending cuts and revenue increases is not an option. We have a federal debt problem that must be addressed to avoid a fiscal crisis. Replacing the fiscal cliff's front-loaded spending cuts and tax increases with a long-term plan would achieve the deficit reduction required to stop the growth in our federal debt while minimizing the short-term economic pain.
The Simpson-Bowles Commission offered a good framework in 2010 for addressing discretionary spending, tax reform and entitlements. Such an outline, which balances spending cuts and increased revenues, is the only way we can ensure long-term growth and bring our debt under control. My hope is that President Obama will work with Congress to quickly lay out a robust, long-term deficit reduction plan before we plunge over the fiscal cliff. Such a plan, coupled with a credible down payment to shrink the budget deficit, should demonstrate Congress' willingness to address this problem and make sure our economy does not grind to a halt. I have met several times with Mark Zandi, chief economist at Moody's Analytics. He developed a plan over the summer that I believe accomplishes these goals. The "fiscal cliff" would be scaled down by half, and those cuts would be narrowly focused rather than made across the board. They still would be split between defense and non-defense budgets.
The Bush tax cuts would be extended, but only for those earning less than $250,000. While middle-class families have suffered during this economic downturn, those making the most have seen their wealth increase. It's time they pay their fair share.
We must make sure more families don't fall under the Alternative Minimum Tax and eliminate scheduled cuts to Medicare payments for physicians to ensure seniors receive proper care. To encourage economic growth, we need to extend key business tax breaks. This will help create jobs and increase revenue. This plan would reduce the $700 billion in cuts to $320 billion, limiting the economic impact and avoiding recession. And it would give Congress time to debate and pass a more comprehensive plan.
The electorate made clear its desire for both parties to work together. Right now, there isn't anything more important than making sure the economy continues to grow and create jobs. I look forward to working with my colleagues starting this week to accomplish just that.