Democrats, including the president, want to avert tax increases for those making less than $250,000 a year but say they will not avert tax increases for those making more, arguing that higher tax revenue is needed to help close deficits.
House Speaker John A. Boehner (R-Ohio) said the CBO report underscores why the House in August passed legislation to avoid tax increases for Americans at all income levels. The Democratic-led Senate passed a competing bill to halt tax increases only on income less than $250,000.
“Instead of threatening to drive us off the fiscal cliff and tank our economy in their quest for higher taxes, I would urge President Obama and congressional Democrats to work with us to stop the coming tax hike that threatens our economy and replace the looming defense cuts with common sense reforms,” Boehner said in a statement.
The White House turned the tables, responding in a statement that the report “only reinforces the urgent need for House Republicans to follow the Senate’s lead and pass a bill that gives middle-class families the confidence that they won’t see their taxes go up at the beginning of next year.”
The CBO report is gloomier than the agency’s January forecast in part because of a decision by Congress to steepen the fiscal cliff by extending a temporary payroll tax break and emergency unemployment benefits, which are now also set to expire in January.
In addition, CBO analysts have concluded that the underlying economy is weaker than previously predicted.
“The magnitude of the slowdown we’re discussing next year is significant,” CBO Director Douglas Elmendorf said at a morning briefing. He noted that going over the cliff could cost the nation about 2 million jobs. Elmendorf said the unemployment rate could remain stuck above 8 percent through 2014.
The agency says growth would be weaker than previously forecast, with the economy expanding by an annualized rate of just 1.9 percent in the second half of 2013.
Even without a year-end fiscal crisis, the Fed “anticipates a very gradual pickup in economic activity over time and a slow decline in unemployment,” with low inflation, according to the central bank’s minutes.
But the Fed members confessed “an unusually high level of uncertainty” about the outlook, noting that Europe’s sovereign-debt and banking crisis and the specter of “a sharper-than-anticipated fiscal contraction in the United States” meant that expectations were “tilted to the downside.”
Republicans have been increasingly vocal about their desire to avert the $55 billion in planned reductions at the Defense Department in January. In Tampa this week, a drafting committee inserted language into the party’s official platform calling the defense cut “a disaster for national security” and blaming Obama for its creation.
The platform does not address the equally stark $55 billion across-the-board cut scheduled to hit domestic programs or offer guidance on how to avert the cuts without worsening the deficits.
While the CBO report outlines the consequences to the economy of failing to reach a deal to avert the cuts and tax increases, it also demonstrates the flip side of continued gridlock: one of the biggest rounds of deficit reduction in modern history.
If Congress does nothing and allows taxes to rise and spending to fall, the CBO predicts the 2013 deficit would plummet to $641 billion instead of exceeding $1 trillion for a fifth straight year.
For the current fiscal year, which ends Sept. 30, the CBO predicts the deficit will be just over $1.1 trillion, down slightly from previous projections, thanks to better-than-expected tax collections and lower spending as the war in Iraq has drawn to a close and the effects of the 2009 economic stimulus have waned.
The national debt is nonetheless growing apace, with debt owed to outside investors set to hit 73 percent of the overall economy by the end of September. That’s the highest level in more than 60 years and nearly double the level in 2007, before the onset of the recent recession.
Rosalind S. Helderman contributed to this report.
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