So What Happened with the Fiscal Cliff?

by Tim Larkins, Senior Manager, Market Intelligence

The mix of expired tax breaks and scheduled budget reductions that came to be known as the Fiscal Cliff has – for a moment – been dodged through a just-past-deadline deal.  Congress has been negotiating over $4 trillion in deficit reductions over the next 10 years; and eventually settled with a reduction of $600 billion over that same time period instead.  You may not be clear as to how the American Taxpayer Relief Act of 2012 will play out, so the following is a guide to help you understand:

• Everyone will pay 5% more in estate taxes on amounts over $5 million
• Everyone will pay 2% more for Social Security tax (up to $113,700 in income) because the Obama payroll tax break will expire
• Anyone making under $400,000 (or couples making under $450,000) will see the Bush era tax cuts as permanent fixtures
• Anyone making over $400,000 (or couples making over $450,000) will see marginal income taxes rise 4.6% because the Bush era tax cuts expire for them
• Anyone making over $400,000 (or couples making over $450,000) will also see capital gains and dividend taxes increase 5%
• Anyone making over $250,000 (or couples making over $300,000) will have exemptions and itemized deductions capped
• Anyone making over $200,000 (or couples making over $250,000) will have investment income tax rates increase 3.8% due to the Affordable Care Act
• Entitlement programs saw no cuts
• The required $1.2 trillion in spending reductions over the next 9 years that was scheduled to begin on January 2, 2013 – known as sequestration – has been postponed until March (and if you reference the 2013 DOD Budget Briefing, you’ll note that immixGroup predicted this back in October)

Regardless of how you fared individually from the tax changes, kicking the budget can down the road unfortunately does nothing for federal CIOs, CTOs, and Program Managers except add to their anxiety.  As we predicted, DOD and Civilian agencies went on a spending spree the last months of FY12 and the first months of FY13 in order to obligate as many funds as possible (in hopes of shrinking the available pool of money that sequestration can draw from).  But Congress has now thrust them into a period of uncertainty, and as we all know from prior Federal sales experience – uncertainty leads to inaction.  To make matters worse, the Federal Government is currently funded under a Continuing Resolution (CR) that ends in March.  This means that agencies will see no new projects started in FY13, and most major technology initiatives will enjoy limited funding and progress.

So what does it all mean to you?  Well the good news is that delaying huge budget reductions and avoiding large tax hikes will most likely stop another recession from occurring this year.  However, the economy as a whole will probably continue with only sluggish growth.  For those in the IT industry, we still aren’t entirely sure how sequestration is going to play out.  I would suggest planning for the worst case scenario; meaning expect DOD programs to have roughly 9% less procurement funds than in FY12 (8% less on the Civilian side), and expect operations and maintenance dollars to fluctuate depending on the program’s importance and priority to the agency.

In a perfect world, come the end of March we would have an Omnibus that funds the government for the remainder of FY13, and we would have guidance on how exactly sequestration will play out.  The more likely scenario is that Congress will give us another CR (or a series of them) to keep the government operating for the rest of the year at FY12 levels, and we will be forced to deal with piecemeal legislation addressing budget cuts throughout FY13 and beyond.  For the average sales person, this means that the plans and approach you developed for November and December will largely remain unchanged through March and April.  So while Congress may have narrowly avoided the Fiscal Cliff, we are still very much plagued by the problems that have confronted us for years.