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.