Smaller paychecks: What the ‘fiscal cliff’ means for Mainers

AUGUSTA, Maine — Maine workers will pay $1.4 billion more in taxes in 2013 if the White House and Congress can’t come to a solid deal that avoids the pending fiscal cliff, the combination of tax cuts set to end and federal spending cuts due to begin in 2013.

That prospect was eased early Tuesday morning when the Senate voted to avoid the imminent tax hikes as well as spending cuts in a deal that still must pass in a reluctant House of Representatives.

That’s a $3,000 impact for the typical Maine family of four, one in which both spouses are working, earning about $70,000 combined and filing income taxes jointly, according to Mike Allen, Maine’s associate commissioner for tax policy.

The increased tax load is one of a number of reasons Maine residents are due to feel an impact if the nation’s fiscal cliff goes unresolved. The White House and Congress were wrangling Monday over a deal to prevent the fiscal cliff in the waning hours of 2012, sustaining doubts about whether a pact could be reached.

The $3,000 per-family tax increase — and the $1.4 billion tax hike statewide — is the result of the expiration of the decade-old George W. Bush-era income tax cuts, the end of the payroll tax holiday that has reduced Social Security payroll tax payments by 2 percentage points, and a range of other tax credits set to expire or shrink.

The Congressional Budget Office has projected that the combination of automatic tax increases and federal spending cuts could send the United States into another recession. And it’s unlikely Maine could escape that fate, Allen said.

Statewide, Maine taxpayers would have to pay $1.4 billion more in income, payroll and estate taxes, according to Allen’s calculations. Some $355 million of that sum is the result of the end of the payroll tax holiday, Allen said. Since 2011, the payroll tax holiday has lowered the Social Security payroll tax deducted from paychecks to 4.2 percent of income from 6.2 percent.

“Certainly, if the U.S. economy goes into recession, I’m sure Maine would be pushed back into recession as well,” he said. “$1.4 billion for the Maine economy: That’s a significant impact on Maine households.”

On the spending side of the equation, federal unemployment benefits that have allowed the jobless to receive checks for up to 99 weeks are due to end. In Maine, that means the end of benefits for about 7,100 people, according to Julie Rabinowitz, spokeswoman for the Maine Department of Labor.

Starting in January, people eligible for unemployment benefits will be able to receive the standard 26 weeks of state unemployment benefits with no federal extensions afterward.

“Even if they do extend it, there’s no way of knowing how long and for what populations of that 7,000,” Rabinowitz said. “It’s always in everybody’s best interest to actively be looking for work or seeking training, rather than wait to see what Congress’ decision is going to be.”

Most federal programs likely will take a hit if Congress doesn’t work out a deal to prevent across-the-board spending cuts. The defense portion of the federal budget would be hit especially hard, raising the possibility of cuts that would affect Maine companies heavily dependent on military contracts, like Bath Iron Works, Pratt & Whitney and General Dynamics.

The Wall Street Journal reported Monday that federal agencies and contractors haven’t been told precisely how the spending cuts would happen, leaving most to speculate about their impact.

At Bath Iron Works, whose sole business is building warships for the Department of Defense, little is known about the impact the fiscal cliff could have, though company spokesman James Demartini said Monday that business is progressing as usual.

“The Department of Defense still hasn’t provided any specific guidance in terms of how they would implement sequestration if it [were] to come about,” said Demartini. “In terms of BIW, we’re coming back to work [Wednesday] just like we always do and continue to work on the contracts that are under our wing right now.”

BIW is in the midst of building three next-generation Zumwalt-class destroyers. Demartini said those ships were all funded in prior fiscal years and likely wouldn’t be affected by the fiscal cliff.

The Maine Department of Education this fall alerted school districts to prepare for cuts to their career and technical and special education funding streams. They also were told to anticipate reduced Title I and Title II funds, which, respectively, help schools educate low-income students and offer teachers professional development opportunities.

The education funding cuts, however, likely won’t affect school districts during the current school year; districts would see their funding drop at the start of the 2013-14 school year unless Congress reaches a deal to prevent the education cuts.

While the spending cuts that are part of the fiscal cliff arrangement are designed to be wide-ranging, the arrangement mostly spares entitlement programs like Medicare and Social Security and exempts other benefit programs for low-income people, like the Supplemental Nutrition Assistance Program.

Medicare recipients, for example, are not expected to see any direct changes to their benefits. However, according to AARP, federal spending cuts will mean a 29 percent cut to the reimbursement rates doctors and other health-care providers receive for seeing Medicare patients.

“That’s the kind of cut that is catastrophic and would cause a lot of doctors to say, ‘I’m not going to do this anymore,’” and reduce their Medicare patient load or decide not to see Medicare patients altogether, said Gordon Smith, executive vice president of the Maine Medical Association.

While the slate of federal spending cuts was designed to be politically unpalatable, the fiscal cliff could help Washington politicians achieve one of their goals: a reduction in the federal deficit. If Congress and the White House reach no deal to avert the fiscal cliff, the Congressional Budget Office projects the federal budget deficit will drop by $560 billion — or about 3.7 percent of gross domestic product — for budget years 2012 and 2013.

BDN writer Christopher Cousins contributed to this report.