WASHINGTON — The so-called “fiscal cliff” situation in Washington has become an overwhelming catchphrase in the halls of Congress, just days after the national focus was on the presidential election. But it is more than just the latest hot topic — it presents a scenario that has Iowa’s governor, congressmen and social advocates deeply frightened of the potential impact on state residents
At issue is a double economic hit that the country would face automatically on Jan. 1 without congressional and presidential action. First, across-the-board sequestration spending cuts would be triggered, including the defense budget, under the terms of an agreement congressional Republicans pushed last year and to which Democrats agreed. Second, tax rates for middle- and upper-class families would revert back to their 2000 levels, before the Bush tax cuts of 2001 and 2003, and President Barack Obama’s tax cuts since 2009.
The “cliff” could be avoided only if Democrats and Republicans find a way to cut $1.2 trillion from the federal deficit, under the 2011 agreement. That could be difficult, as Democrats are pushing for higher tax rates for the wealthy and Republicans are resisting.
The issue so overwhelms the House and Senate agendas that two other issues critical to Iowans — the farm bill and a tax incentive for the wind industry — have been forced to the back-burner. Gov. Terry Branstad, who heads a coalition of about two dozen bipartisan governors across the country who are promoting wind energy, came to Washington last week to push for the tax incentive but conceded that the issue will have to wait its turn.
Branstad told The Gazette he believes the potential impact to Iowa could be “grave,” noting the impact of a federal estate tax on farmers and small businesses, jobs in jeopardy at Rockwell Collins in Cedar Rapids and the impact on the state budget.
“There will be some consequences that could be severe, especially if you have the combination of sequestration and this massive tax increase — will it throw the country back into a recession?” Branstad said. “At the state level, we’re in a strong position, but we know we’re going to have to accept more responsibility because federal money is going to be cut. That’s the big uncertainty.”
Branstad has reason to worry. Because federal and state revenues are so closely tied together, tax changes at the federal level would have a trickle-down effect on state tax revenues.
A report last week by the Pew Center on the States in Washington, D.C. found that 25 states will actually see higher tax revenues if the federal tax rates increase.
The impact on Iowa is mixed, according to the report — the state would receive less revenue because its federal tax liability would increase and because the state allows deductions on federal income taxes. But revenues could also increase at the same time because the state receives benefits from some federal tax credits. The state also has far fewer federal employees than other states, making it somewhat less susceptible to federal salary cuts.
However, even with a relatively small workforce of defense industry employees, Cedar Rapids would get particularly smacked if defense cuts happen as scheduled. In September, Rockwell Collins announced that as many as 1,000 employees may have to be laid off, 350 of which would be directly related to the potential spending cut and others due to declining defense spending and other factors.
Company spokeswoman Pam Tvrdy said those numbers still stand, although not all layoffs would be in Cedar Rapids.
She said layoffs would be determined based on which specific programs are impacted and which branch of the company serves that particular program. She also said the commercial side of Rockwell Collins, which serves the airline industry, is more healthy and some employees could be shifted instead of eliminated.
Rockwell Collins has 8,600 employees in Cedar Rapids, and has already cut 250 jobs this year. Tvrdy said the company is still uncertain about future layoffs.
“We have not said we will, but we have said it’s possible with sequestration and the other challenges of a spending reduction,” she said.
Others are worried about the potential effect on Medicare recipients. The state has 455,000 residents on the federal program, which would be among those with reduced funding. According to AARP Iowa, 15 percent of the state’s population is 65 years of age or older, and the number of Iowans above 85 years old is expected to jump by 36 percent by 2030.
Because Medicare is an entitlement program, officials can’t raise eligibility standards to reduce the load of recipients. But some say health care access would become more difficult because there would be fewer federal funds to reimburse doctors who treat Medicare patients — therefore, fewer doctors may accept those patients.
“I’ll bet (the spending cut) will come out of reimbursements for doctors and hospitals,” said Sen. Chuck Grassley, R-Iowa. “That’s going to be bad in particularly in rural America, and even in the larger cities of Iowa because they’re already reimbursed low in Iowa anyway. You take more out, and you’re going to have more doctors say ‘I’m not going to mess around with Medicare patients,’ and they don’t have to.”
AARP’s Iowa state director, Kent Sovern, agrees with the potential for that scenario. He said seniors are rightfully worried.
“Absent a solution, you’ve got a whole lot of Medicare recipients and physicians who would wonder where to turn next,” Sovern said. “In other words, I may be a citizen with a Medicare card in my pocket, but what is the value of that card?
“The overwhelming message I’m hearing from Iowa seniors is that they understand the need for a balanced approach that understands the need for revenue and the high cost of medical services, but they are far more concerned about the health of these programs.”