Recession Looms Without Compromise, Arkansas Leaders Fear

If Congress fails to address the so-called fiscal cliff, the United States faces another recession, leaving Arkansas political and business leaders to hope the critical hour of decision will force the appearance of bipartisanship.

The fiscal cliff remains an icon of the hour: a metaphorical escarpment built on a mountain of national debt that stands at $16 trillion and growing.

Threatening to send the economy tumbling over the edge in 2013 is a convergence of possible tax increases and automatic spending cuts intended to reduce the federal government’s budget deficit.

“All of that coming together would have a very, very negative effect on our economy,” said U.S. Sen. John Boozman, R-Ark. “If we don’t figure out how to come up with $1.2 trillion from the last deal that was struck with the debt ceiling, then we’ve got to have massive defense cuts.”

The sequestration component of the 2011 Budget Control Act mandates $1.2 trillion in budget reductions during 10 years. Those largely across-the-board spending cuts — including cuts in the defense budget that don’t sit well with Republicans like Boozman — would begin in 2013.

The tax increases looming in the equation are linked with the expiration of a two-year extension of tax cuts dating back to the Bush administration.

Revenue needs to increase, and spending needs to decrease, but what cost can the struggling economy bear?

“There has to be a balanced approach to whatever happens,” said Ark Monroe III, an Arkansas lobbyist who represents a varied list of clients dominated by insurance companies. “There will have to be legislation to promote revenue enhancement to get more money in the door and some degree of entitlement reform to cut spending.

“Then, this gets down to where you get some control of defense spending. But as long as we’re in a war, you can’t make drastic cuts while you have a lot of troops in the line of duty.”

Monroe recalls a slogan made famous by the late U.S. Sen. Russell B. Long, D-La., that is still appropriate today: “Don’t tax you. Don’t tax me. Tax the fellow behind the tree.”

“These are hard choices, and everyone has to be willing to sacrifice to get there,” Monroe said. “Everyone is so entrenched, and that worries me because we’re on the edge of this fiscal cliff.”

Expectations are that some of the Bush-era tax cuts will be extended for at least another year because of continued recessionary concerns.

President Barack Obama has expressed his intent to continue the tax cuts for households reporting income of $250,000 and below. Verbal jousting continues over whether majorities in Congress will go along with allowing taxes on high incomes to bounce back to pre-1991 levels.

If the Bush tax cuts aren’t extended, the maximum long-term capital gains tax rate would return to 28 percent from 15 percent. The rate for short-term capital gains would return to the corresponding tax rate for ordinary income.

Ordinary income tax rates for the upper four tax brackets would return to 28 percent, 31 percent, 36 percent and 39.6 percent.

“We’re hoping that common sense and bipartisanship will prevail to keep us from going over the fiscal cliff,” said Randy Zook, president and CEO of the Arkansas State Chamber of Commerce.

“Because if we do, it will drive us to a recession. We can’t afford it, and there’s no reason for it.”

On the revenue side of the equation, Zook is among those advocating the return of a special repatriation tax to encourage American companies to bring overseas profits back home.

He points out that U.S. companies are holding more than $1 trillion overseas to elude federal corporate taxes. On paper, the U.S. corporate tax rate of 35 percent is one of the highest of any nation. However, through deferral and other strategies, American companies as a whole typically pay a fraction of that and some not at all.

“All that does is make companies invest more of their money overseas and conduct more of their business there to avoid U.S. taxes,” Zook said. “Make it a permanent 5 percent tax. That can lead to dividend payments, which in turn can be taxed.”

And if the Bush-era tax cuts aren’t extended for higher-income taxpayers, such dividends would be taxed as ordinary income rather than enjoying the current 15 percent rate like capital gains.

Closing tax loopholes that facilitate American corporations keeping money generated by international subsidiaries untaxed and offshore would enhance revenue, too. But the political realities of that happening are rated as slim to none by Beltway pundits.

On the spending-cut side of the equation, Zook said changes to some entitlement programs could be less painful than others.

“We have to deal with entitlements,” he said. “The sooner we do, the sooner we save ourselves from a fate we don’t want to contemplate. Social Security is the easiest fix. They have to raise the minimum retirement age.”

Paul Cunningham, executive vice president of the Arkansas Hospital Association, said he doesn’t have a feel for what the consensus might be among his constituents regarding expectations or answers.

But Cunningham is hopeful that a new political climate will replace congressional gridlock after Nov. 6 and facilitate action. He believes the election results could embolden the re-elected and free the un-elected among the 435 representatives and 33 senators who will finish out terms this year.

“There is at least some possibility that during the lame duck term that something could be done,” Cunningham said. “Whether it’s something good or bad is open to debate.

“The deficit is a major issue.”