We may not have avoided going over the fiscal cliff, but Congress did act to make a deal to undo some of the damage. For a good overview of what it did and did not include, read my Nation colleague George Zornick. Overall, it’s basically a mixed bag. Long before the deal was reached and passed, I had warned that the components of the fiscal cliff deal would hit the poor hardest. So how did they make out in the end? It’s a mixed bag for them too, but things are likely to get worse before they get better.
First, the good news. The biggest takeaway, perhaps, was for the unemployed: they saw a one-year extension in federal unemployment benefits. This will help keep many families out of poverty. In 2011 alone, unemployment insurance lifted 2.3 million people out of poverty. Unemployment remains painfully high, making these benefits still incredibly important to millions.
Another very important piece of the deal was a five-year extension of crucial tax breaks: the Earned Income Tax Credit, Child Tax Credit and the American Opportunity Tax Credit. The first two alone mean that 13 million families—and their 26 million children—will avoid paying an average of $843 extra a year in taxes. Specifically, 8.9 million families will avert a hike of $854 through the Child Tax Credit and 6.5 million will avoid a raise of $530 under the EITC. That’s not chump change when you struggle to put food on the table.
But one crucial tax break didn’t make it: The payroll tax holiday was allowed to expire. Unlike most income tax rates, which rise as income rises, the payroll tax is a fixed percentage. Letting it lapse means that nearly every worker will see taxes go up, but the pain will be felt most at the bottom. Two-thirds of those in the bottom twenty percent of income will be affected by it. For example, a worker earning less than $20,000 a year will pay about $100 more a year in payroll taxes—the equivalent of a family‘s groceries for a week. A bit further up the ladder, someone making $50,000 a year, about the national median, will pay $1,000 more, canceling out the $1,000 break she would get from other parts of the deal.
And one mustn’t forget that a big component of the fiscal cliff were the sequestration spending cuts, which have now simply been pushed back by two months. This was the across-the-board package of spending cuts totaling $1 trillion, equally divided between defense and non-defense discretionary spending. These are cuts that no one wants to see go through—they were meant purely as incentive to make Congress act on reducing the deficit. As Zornick writes, “the Democrats haven’t given anything away until they have,” but by simply by pushing these back, “Obama has set up another spending fight (in addition to the one over funding the government in March when the current continuing resolutions run out)—and one in which he doesn’t have the leverage of the expiring Bush tax cut rates.” The double whammy of trying to get Congress to raise the debt ceiling while also trying to keep it from torching the social safety net does not bode well for the poor.
If the cuts are implemented on non-defense discretionary spending, it will be devastating. These programs have already taken a beating, as $1.5 trillion in cuts to defense and non-defense discretionary spending over the next decade was already put into law last year. Three-fifths of that reduction will hit the non-defense side. Any further cuts will come on top of all of this to vital programs that are already suffering from a lack of funding. The poor will feel the biggest hit from reducing them further. A quarter of all non-defense discretionary spending goes to programs they rely on, from home energy assistance to Section 8 housing vouchers to the WIC nutrition and healthcare program for mothers and children.
Meanwhile, if there’s a “grand bargain” in two months that includes entitlement cuts, the poor should also be afraid. One proposal floating around during fiscal cliff negotiations was using a chained CPI to calculate Social Security benefits. As I wrote before, doing this would slam poor elderly women, reducing their benefits by $56 a month by age 80, what a woman at that age would spend on a week’s worth of groceries. By age 95, benefits will be reduced by what she would spend on two week’s worth of food. Yet these benefits represent basically the only source of income for nearly 40 percent of women over age 80 (and almost 30 percent of men).
Another proposal that was floated was raising the Medicare eligibility age. Doing this would mean leaving as many as 270,000 elderly uninsured in 2021. The hope would be that of that number, those who live below the poverty line could sign up for Medicaid after it’s expanded by the Affordable Care Act. But given that many states are refusing to expand the program, over 164,000 could be stranded, unable to sign up for Medicaid or Medicare. Where will they turn when they inevitably experience the health problems older Americans face?
This was indeed a manufactured crisis, and the next one will be as well. So while Congress wrings its hands and gnashes its teeth, remember that they created this mess, particularly when the inevitable solution is to inflict more pain on the vulnerable.
Check out D.C. correspondent George Zornick’s breakdown of “The Good and Bad of the Fiscal Cliff Deal.”