Reviews of the “fiscal cliff” agreement reached at the last possible instant by Congress have focused primarily on political winners and losers. Hardly any attention was paid to the bigger question: Is it good for the economy? Are we closer to getting things back on track?
The answer is a cautious yes, both for what the agreement does, and what it doesn’t.
The tax increases on wealthy Americans were necessary to begin – though not end – the process by which the federal government balances revenues and spending, a process derailed by the George W. Bush tax cuts of 2001 and 2003, and which the Great Recession prevented us from correcting earlier. It doesn’t make sense to raise taxes across the board during an economic slump, and the recovery is still too weak to do it now.
President Obama’s allies faulted him for not doing enough to fulfill his campaign pledge to raise taxes on the wealthy, but in fact the increases span a broad range. Again, attention focused on the top income tax rate, which rose from 36% to 39.6%, but the increase for capital gains and dividends, from 15% to 20% for the same group is probably more significant.
The unsustainably low rate on capital gains is why Mitt Romney, for instance, managed to pay less than 15% of his multi-million-dollar annual income to the federal government – and why, as Warren Buffett, America’s favorite billionaire, often says, he pays a lower tax rate than his secretary.
The estate tax will also rise from 35% to 40%, though the $5 million exemption remains. And finally, an increase in Medicare taxes for the wealthiest also kicks in Jan. 1, part of the revenue needed to fund the Affordable Care Act.
Given that only the top 1% of Americans have seen any real income growth over the last five years, these increases are not only fair, but overdue.
The “cliff” deal does not include any further spending cuts, and this too is a good thing, for now. What all the enthusiasts for cutting the budget, the federal debt, and the wonderfully abstract “entitlements” (read: Social Security and Medicare) fail to reckon with is that cutting public spending during an economic slump prolongs the slump.
That’s why Europe, having embraced austerity, in now back in recession while the United States has maintained very modest but steady growth.
There’s a lesson for Maine, here, too. The LePage administration has enthusiastically promoted austerity without acknowledging its effects on the state economy. The most favorable number administration supporters can find is 7,000 net new private sector jobs during its first two years. Unfortunately, public employment has dropped by an equal amount, meaning that Maine’s economy is stagnant while those of its New England neighbors (except Rhode Island) have started growing again.
The Legislature will soon be making critical decisions about what parts of the LePage agenda to keep, and what to scale back. A centerpiece is the $500 million or so package of tax cuts enacted in 2011 but taking effect only in 2013. The cuts contain reductions in the estate tax and for cuts for top income groups – the opposite direction from federal policy.
Another complication is that the cuts were achieved partly by serious reductions in aid to education and municipal revenue sharing – a total of $275 million, according to the Maine Municipal Association. Cutting taxes by forcing municipalities to choose between further spending cuts or raising property taxes may not be a good bargain.
And there’s one more feature of the cliff agreement that presents an opportunity for Maine. Just as it expired, the renewable energy tax credit that supports the windpower industry was renewed for a year; projects begun during 2013 can take the credit after they become operational in 2014. Last year, new investment almost ceased because of uncertainty over whether the credit would be renewed.
Now that it has been, at least half a dozen major Maine projects can move forward, which would provide a substantial boost to an industry that’s already produced $1 billion in investment here. And, if Maine plays its cards right, it could develop new manufacturing capacity that would add to the numerous construction jobs windpower already produces. Colorado, for instance, has four wind turbine plants that employed 1,100 workers before the tax credit chill.
This might be a good time for the administration to revise its contradictory stance on windpower and support a rare new indigenous industry. We need to find new jobs somewhere, and this is one of the most promising places to look.
Douglas Rooks is a former daily and weekly newspaper editor who has covered the State House for 28 years. He can be reached at email@example.com.