CBO Weighs In On “Fiscal Cliff”

Published by Michael Novogradac on Friday, May 25, 2012 - 12:00am

This week the Congressional Budget Office (CBO) released analysis suggesting that unless lawmakers are able to address the multitude of fiscal deadlines they will face beginning on October 1, the country might face a recession in 2013.

As I wrote in this month’s Journal of Tax Credits, Congress faces a perfect storm of fiscal pressure that will come to a head in late 2012 and early 2013. Among the largest pressures are the expiration at the end of 2012 of Bush-era tax rates and a number of other tax provisions, and the automatic spending cuts mandated by the Budget Control Act of 2011 that will be triggered on January 15 and would apply to mandatory and discretionary spending in 2013 through 2021.

In its report, “Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013,” The CBO suggests three possible options for Congress:

“They could address the short-term economic challenge by eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years—but that would have substantial economic costs over the longer run. Alternatively, they could move rapidly to address the longer-run budgetary problem by allowing the full measure of fiscal restraint now embodied in current law to take effect next year—but that would have substantial economic costs in the short run. Or, if policymakers wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, they could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period.”

No real congressional action is expected during the run-up to the November elections. After the election results are tallied and political fates decided, lawmakers will be under incredible pressure to address these fiscal pressures. As a result, they could strike agreements during the lame duck session tax and budget bills that could have significant consequences for affordable housing, community development, historic preservation and renewable energy.