Fiscal cliff cuts start with defense but could go deeper

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The fiscal cliff is looming larger, and the country actually might endure a series of draconian cuts and tax increases — something that was never supposed to happen.

When Congress passed a law in August 2011 requiring $1.2 trillion in across-the-board cuts — half from the Department of Defense — it was supposed to serve as a wake-up call for compromise to get the national debt under control.

Instead, Congress hasn’t found that common ground — and in a few short weeks, the cuts become reality, at least in the short term.

What’s affected? Student loans, the space program, Federal Aviation Administration, Medicare, the Pentagon, the government’s funding for research — pretty much every area of government will begin feeling the pain on Jan. 2. About 1,200 departments face cuts ranging from 2 percent for Medicare to 10 percent for most other areas. And there’s no wiggle room, no ability to juggle money from one program to another. The cuts apply to every program with very few exceptions.

Colorado Springs, with its four military bases, stands to lose more than most other cities.

“We’ve been assured by our elected leaders that it won’t happen,” said Stephannie Finley of the Regional Coalition for Strategic Federal Action, a local group that paid to hire a federal lobbyist for Colorado Springs for the first time. “But there is a great deal of alarm. The cuts weren’t done thoughtfully — and there will be a big backlash. Congress has always waited until the last minute, then pulled it off. But this time, I’m getting nervous.”

Some areas are exempt: Medicaid, Social Security, the Child Health Insurance Program, the Supplemental Nutrition Assistance Program, veterans’ benefits, Temporary Assistance for Needy Families, refundable tax credits and some highway programs. But everything else — including parks, education, low-income housing and medical research — is on the chopping block.

About 1.2 million jobs could disappear as a result of the fiscal cliff, and Finley says that if companies leave the Springs because the Pentagon’s budget has dried up — that spells disaster.

“I keep telling people that we cannot just complacently sit by; there’s too much at stake,” she said. “We all need to be alert; we all need to do what we can to encourage elected officials to find a resolution. I know people think it only affects defense, but these cuts are going to affect people in their own world — coffee shops, dry cleaners, retail businesses.”

That’s not all. If negotiations fail, the payroll tax-cut holiday would expire and Medicare doctors face a 24 percent cut because the last temporary fix would expire as well. Bush-era tax cuts would sunset, bringing the tax rate on the richest earners back up to the Clinton-era rate of 39.5 percent. Business taxes and student loan fees would be noticeably higher.

The White House’s Office of Budget Management issued a report earlier this year saying there was no way to plan for the cuts and tax hikes.

“The sequestration itself was never intended to be implemented,” the report said. “Congress can and should take action to avoid it by passing a comprehensive and balanced deficit reduction package. As the administration has made clear, no amount of planning can mitigate the effect of these cuts. Sequestration is a blunt and indiscriminate instrument.”

The uncertainty surrounding sequestration leaves businesses and government agencies unable to prepare for the onslaught of tax hikes and program cuts.

“It’s going to be bad,” said Dan Stohr, spokesman for the Aerospace Industries Association. “We just don’t know how bad. It wasn’t supposed to be like this. The cuts were designed to be unpalatable for everyone, regardless of party. There doesn’t seem to be the political will or the desire to compromise to stop it.”

Sequestration wasn’t designed with long-term stability in mind, he said. The way the law is written, the 10 percent across-the-board cuts will take place as contracts come up for renewal.

“Every day government contracts come up for renewal,” Stohr explained. “Every day. Thousands of them a year. So that means contractors will cut 10 percent from their bottom line, and then pass that cut along to their suppliers. Suppliers will cut jobs and that means that businesses on Main Street — the businesses that rely on people to have jobs and spend money — will also feel the brunt of the cuts.”

And if that happens, the local community will feel the effects immediately.

“Businesses are going to cut back, to plan for higher taxes and the sequester,” Finley said. “And they’re going to start planning for that contract cut. I think we’ll feel it pretty quickly.”

Local impacts

The El Paso County Board of Commissioners issued a resolution to elected officials, asking that they work to avert the fiscal cliff. The effects, they said, could devastate the region.

According to information from the county, the state receives about 25 percent of its budget from the federal government. Services and jobs would be cut. Health and Human Services would expect to see a 7.5 percent annual reduction, or a total of $16.75 million annually. Private education services would be cut by 517 jobs, while community food, housing and other services could see 247 lost jobs.

In El Paso County, the Department of Health and Human Services estimates a 7.5 percent decrease — a loss of $5.4 million in federal and state money.

But the local picture gets worse. The defense industry makes up about 30 percent of the county’s economy and the four bases have an economic impact of $5.89 billion a year. Estimates suggest the area will lose about $4.7 billion if sequestration occurs, according to county budget officials.

Over the 10-year period, that number would go up to $47.1 billion, they said.

But the picture is still hazy. No one is sure what cuts education and job development services would take — and that could make the number go higher.

“This is very serious,” Finley said. “We’re meeting about it, talking to elected officials. We know cuts are coming, and some of them we’re fully aware of, but many things are still so uncertain.”

Department of Defense

Sequestration talks have focused on the defense industry, because the DoD would bear half the $1.2 trillion in cuts, starting with a $53 billion cut next year.

“The problem is that we’re already three months into the fiscal year, so we’re cramming a full year of cuts into nine months,” Stohr said. “That is going to be a problem.”

Stohr points to a Virginia contractor who was planning to build a multi-million dollar facility and hire 2,500 people for a contract to build new F-35 fighter jets. But those plans were scrapped because no one knows what’s going to happen.

If this Congress votes to kick the can down the road, Stohr said that could make matters worse for the Defense Department.

“If they put it off for six months, then they’re going to risk shoving $53 billion in cuts in a single quarter,” he said. “They might as well shut the place down.”

Health care

The one area taking the softest hit: health care services. Medicare faces only a 2 percent cut, said Bob Semro of the Bell Policy Center in Colorado, hitting reimbursement rates by insurance companies and doctors.

“That’s the only real health care-related cut due to the sequester,” he said. “But that doesn’t mean Medicare isn’t facing a crisis.”

That’s because Congress passed a law back in 1995 saying reimbursement levels couldn’t rise above the rate of inflation. But health care costs have spiraled out of control, and Congress has failed to enact cuts needed to fix the system. Instead, it has issued temporary fixes. The latest is set to expire just as the nation reaches the edge of the fiscal cliff.

“It’s a coincidence that the two are happening together,” he said. “But they’ve pushed off a permanent fix for so long — it’s so costly — that if they do it now, doctors won’t take Medicare anymore.”

After years of temporary fixes that essentially pushed the issue to another Congress, the Medicare reimbursement cut equals around 24 percent — on top of the 2 percent that’s part of the sequester.

“If it happens, it’s going to become more difficult to find providers,” Semro said.

Compromise

Don’t give up on Congress too quickly, says Finley. In the past, leaders have pulled out an 11th-hour solution.

“That’s just the culture of Congress,” she said. “But this time, things look less certain.”

Semro is more optimistic — to a point.

“I’d never try to predict what Congress will do,” he said. “I think that there will be a grand compromise. But I think that will involve entitlements. The largest entitlements are Medicare and Medicaid — so we might see more cuts there than we currently have.”

Experts and politicians alike believe sailing over the fiscal cliff come Jan. 2 will be dangerous for the fragile economy. Many cuts are unknown — cuts to the parks service, to education funding, to federal funding for space exploration.

“There’s so much we don’t know,” said Stohr. “It’s impossible to plan.”

Colorado impact

18,442

DoD jobs at risk

24,120

Non-DoD Jobs at risk

42,562

Jobs at risk

Source: Aerospace Industries Association

25 percent

State funding from federal government

$4.7 billion

Amount El Paso County will lose in sequester

$5.4 million

Health and Human Services cuts in El Paso County

Source: El Paso County

2 Responses to Fiscal cliff cuts start with defense but could go deeper

  1. The importance of this fiscal crisis cannot be ignored. Expert economist Steve Forbes, recognizing this importance, wrote a letter to Speaker John Boehner urging him to follow a sensible plan that stays true to fiscal conservative values. It’s a pretty interesting read written by a very intelligent and sensible man. Anyways, here’s the link for those who are interested.
    forbes.com/sites/steveforbes/2012/12/06/message-to-gop-no-tax-increases-go-on-offense/

    Richard Feldman
    December 8, 2012 at 5:24 pm

  2. I’d like to know where are congressmen, Doug Lamborn stands on the fiscal cliff debate as well as the debt ceiling debacle. Colorado Springs has more skin is the game than many communities. Is Mr. Lamborn keeping the well being of his constituency in mind while the House plays games?

    Andrew Hershberger
    December 10, 2012 at 5:32 pm