Tag Archives: fiscal cliff

You may have run across a faux prophet proclaiming “the end is near” and scoffed at his deluded conviction. However, to watch the news as of March 2013 you would believe the prophet was sourcing the Associated Press. Reportedly, we walked the plank and were living in a post-apocalyptic age; floating in limbo, unaware of our newfound economic dystopia. The word du jour, “sequestration,” or the series of budget cuts collectively known as “the sequester”.

Initially designed by Congress to be a painful, indiscriminate, “fiscal doomsday” that would force our legislative bodies to work together and pass a major budget resolution, the sequestration is a product of the Budget Control Act of 2011. The kerfuffle, then known as the “fiscal cliff,” was yet another action versus deadline squabble so widespread in hype and speculation that the uncertainty around America’s future contributed to our credit downgrade by Standard & Poor’s from triple A to double A plus. In late 2012, the dire deficit-reduction was postponed from its original start date of January 2, 2013 to March 1, 2013 allowing Congress more time to reach a deal. However, no deal was made and as of March 1, 2013 sequestration began.

Currently, nearly 1 trillion dollars in spending cuts are set to take effect over the next 9 years; half from military spending, the other half from domestic programs and initiatives. $85 billion in cuts are set to begin immediately. Thousands of government employees have received notices of work and wage cuts. Millions are lined up to be siphoned from programs like Head Start. Meanwhile, more stalemates appear in Congress. Politically, the sequestration is a happy accident. Representatives and senators can express a lot of sound and fury, signifying nothing while letting this so-called “meat ax” to spending make significant though ham-fisted progress in deficit-reduction.

President Obama has led the call for budget overhaul for more than a year now. He’s offered his plan to cut “tax loopholes”. One specific tax loophole catching attention is the accounting method known as Last In, First Out (or LIFO). Using LIFO, companies can make assumptions as to the cost of their goods sold reporting the most recently purchased items in their inventory as the items sold during operations. The older inventory purchased at lower cost carries over to future years. The resulting higher costs of good sold is a lower net income and thus lower tax liability for companies using this accounting method. Needless to say, LIFO is popular among U.S. corporations.

The “loophole” reduction plan has been met with staunch opposition from corporations. Were it to gain support and become law, companies would not only have to spend the time and money converting to an alternative method (most likely the “First In, First Out” cost flow assumption) but these firms would also become responsible for the tax savings they had accumulated over the years. It’s hard to find companies that willingly want to pay more taxes. Rite Aid has saved approximately $372 million using LIFO accounting.

Lobbyist have come out of the wood works in opposition to proposals to cut LIFO. The website OpenSecrets.org lists documents reporting hundreds of thousands of dollars spent in their efforts to influence the House of Representatives and the Senate. The expenses incurred fighting the proposal pale in comparison to the amount of taxes these corporations would be responsible for otherwise. Meanwhile, organizations such as the Associated Equipment Distributors have joined larger groups in the LIFO Coalition to launch websites such as SaveLIFO.org in attempts to sway public opinion. President Obama, on the other hand, hit his highest approval ratings in February of 2013 since his first year in office.

The entire fiasco around “the sequester” would make a talented bit of politicking were it the intention all along. Avert the “fiscal cliff” by agreeing to a raised debt-ceiling and harsh spending cuts thus giving both liberal and conservative politicians their desired result to take back to their constituencies. From there, attempt to work out a better deal while compromising little-to-nothing until the budget cuts come into effect. Once the cuts begin, claim the other side wouldn’t meet you in the middle while austerity measures slip by the general public eye. Give soundbites full of sound and fury but signifying nothing for the press. In the end, claim that under your watch the deficit was cut by hundreds of billions of dollars.

Sources:

House.gov | Budget Control Act Summary
House.gov | Stop Sequesters Job Loss Now Act Fact Sheet
OpenSecrets.org | Lobbyist Spending
CBS News | Three Weeks In Sequester Impacts Growing
Washington Post | Is Sequester Here To Stay?
Reuters | Fitch to Potentially Lower US Rating
USDebtClock.org | US Debt Clock
Politico.com | Poll: Obama Approval Highest Since ’09
SaveLIFO.org