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For an economy struggling to gain altitude it is hard to see how the impending spending cuts and tax increases associated with the “fiscal cliff” will do anything in the short-term but bring the economy to stall speed or push it back into recession.  At a time when compromise is seen as weakness and ideological impurity, an agreement must be reached in order to avoid the negative effects of the the fiscal cliff.  Depending on what is included, the ‘fiscal cliff includes anywhere from $500 to $700 billion in combined spending cuts and tax increases (many via the expiration of temporary cuts).

All states will feel the effects of the elimination of the temporary cut in the payroll tax but states with a higher percentage of high-income taxpayers will likely be affected more by the expiration of Bush era tax cuts.  Despite often being characterized as a “tax haven” for the rich, NH is much more a “haven for the middle class” as it has a somewhat higher percentage of high-income households than the U.S. (but much lower than MA) and a relatively smaller percentage of lower- income individuals.   The percentage of high-wealth individuals in NH is above the U.S. average, but the percentage of income taxes paid by those making $200,000 or more in NH is lower than 24 other states.

States where higher-wealth individuals pay a larger portion of the  state’s tax burden are likely to be relatively more affected by the tax cut expiration provisions of the fiscal cliff.   But NH will still see an estimated increase in payroll taxes of about $650 million, a significant drop in disposable income in the state.  In addition, a study by George Mason University’s Center for Regional Analysis estimates that the defense department and non-defense department budget cuts that will  result from  the fiscal cliff will cost NH about 6,300 jobs and $325 million in labor income.  NH no doubt will take some solace from the fact that Massachusetts is likely to see nearly 10 times the job losses from  budget cuts to defense and other purposes (especially medical) and as a result of  their high percentage of high-wealth households.

I want to think a reasonable resolution will be found that avoids the worst of the potential problems from the fiscal cliff.  Fiscal tightening is clearly warranted,  and it appears almost certain that at a minimum the payroll tax holiday will be allowed to expire  as well as the Bush era tax cuts for upper income households.  It is also almost certain that long term unemployment insurance benefits will be allowed to run out.  After that, it all depends on one four-letter word – compromise.

This entry was posted on October 30, 2012 at 10:11 am and is filed under Fiscal Cliff, Fiscal Policy, job growth, NH Economy, Politics. You can subscribe via RSS 2.0 feed to this post's comments.

Tags: budget cuts, fiscal cliff, household income, middle class, NH, tax cuts, tax increase