November 27, 2012 6:25 pm

Climbing back up cliff equally perilous

Washington policy makers worried about the economic cost of going off the fiscal cliff may be missing a crucial issue – the considerable difficulty of climbing back up it after a fall.

Some Democrats, such as Washington senator Patty Murray, are flirting with the idea of going off the fiscal cliff as a way to secure a bigger increase in tax revenue.

They argue that the fiscal challenge is less a cliff than a slope, because the tax rises and spending cuts it includes take effect over a full year, and would not do much harm if a deal was passed in January.

But that is only true if a law to climb back up the cliff can pass rapidly in the new year, fully reversing its effects – and people with experience of the budget process doubt that can be done.

“I just want to emphasise the extraordinary difficulty of passing legislation this complicated in a short time,” says Steve Bell, a former staff director of the Senate Budget Committee, who works on economic policy at the Bipartisan Policy Centre in Washington. “If you look at the calendar and the constitution it's really hard.”

If the US goes off the fiscal cliff then all of the tax measures will take effect on January 1 – income tax rates rise, payroll taxes go up and extended unemployment benefits cease – while automatic cuts to spending take effect on January 2.

The 20th amendment to the US constitution means that the new Congress will start on January 3. In theory, the old Congress could climb back up the cliff on the 1st or 2nd, but that is unlikely.

That creates two complications. First, retiring legislators who may find it easier to vote for unpleasant measures will be gone. Second, there will be a host of new legislators trying to tackle complicated tax laws on their first day in the office.

Even if a deal were struck early in January – far from guaranteed if it had proven impossible in December – it would still take time to pass.

In general, a tax bill has to pass out of the House Ways and Means and Senate Finance committees, pass both chambers of Congress, be reconciled in a conference committee and then go to the president for signature. An appropriations bill to tackle the spending cuts follows a similar path.

“You can talk to anyone who’s done it – that is just virtually impossible to do in 30-60 days,” says Mr Bell. All sorts of procedural fiddles might be used to climb speedily back up the cliff, but the legislation will be more complex than last year’s debt ceiling deal, so it will take time to write and pass.

After that would come the administrative challenge of implementing a deal. The scope of that would depend, in turn, on how long the US had been off the cliff.

The Treasury could, in theory, delay a change to the tables that decide how much tax is automatically withheld from workers salaries. If it did so then reversing the income tax part of the cliff would be easy, but Timothy Geithner, the Treasury secretary, has questioned his authority to do so without instructions from Congress.

The administration could also, in theory, delay some of the spending cuts – but once they go into effect they will be hard to reverse. For example, once a defence contractor downs tools or dismisses workers, it will be time-consuming and costly to start work again.

Finally, there will be an issue about 2012 tax filing. The Internal Revenue Service says that it would have to instruct 60m taxpayers not to file until either a deal was passed or it reprogrammed its computers. Even if a deal were passed in January, the backlog could mean delays to tax refunds, causing a further effect on consumer spending.

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