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Monday, Sep 25, 2023

Falling Hard Off the Fiscal Cliff

In the weeks following the media-hyped negotiations in Washington on the “fiscal cliff,” it has become clear that there will be no winners from the final deal. After discussions about extending or ending tax breaks to certain income brackets and arguments from both sides ad nauseam, the deal ended with nearly everyone expected to take a hit to their paychecks. For the past two years, the payroll tax rate has been 4.2 percent. This lower rate was instituted to give consumers a break during the recession. The revenue from the tax goes to fund the Social Security program. As of Jan. 1, the rate for the payroll tax was raised back to 6.2 percent on the first $113,700 in wages. The Valley Industry and Commerce Association (VICA) believes the last-minute action of our federal government will have a detrimental effect on our local economy. Local residents cannot afford cuts in their take-home pay, and our small businesses will find it more difficult to stay afloat. While the average worker will see about $300 less in their pockets this year, they are not the only ones who will feel the pinch from this rise in costs. Economists estimate that this increase in payroll tax will pull a whopping $115 billion in disposable income from the economy. This is disposable income that would have been spent on retail purchases, services and family outings. The Congressional Budget Office (CBO) acknowledges that the sharp rise in taxes will cause slower economic growth, job cuts and less prosperity for all Americans. According to the CBO, 77 percent of U.S. households will experience an immediate reduction in spendable take-home pay. Concern over the new tax structure extends beyond individuals. The percentage of small businesses that generally file as an individual (due to the lower income of the business) will be hard-hit as well. Businesses in the San Fernando Valley will be impacted strongly, particularly in the restaurant industry, retail shops and others. With economists expecting consumers to decrease their spending, the small businesses that make up our diverse region and the backbone of our economy will be hit the hardest. It is yet another economic blow to these businesses that have already survived the worst economy since the Great Depression. The end of this payroll tax holiday will also have a detrimental effect on unemployment rates. The state unemployment rate recently fell below 10 percent for the first time in years. This may not last for long, however. The payroll tax cut was originally created to help stimulate hiring and job creation. It is estimated that the cut in the payroll tax helped to create approximately 300,000 jobs across the nation. With the end of the holiday, we can expect to see fewer jobs created and perhaps even a rise in the unemployment rates. Yet again, the federal government failed our small businesses and set the stage for economic growth to come to a sputtering halt. The deal that was passed will not put an end to the fiscal woes of the country as it has been left open-ended with many items to be resolved. The federal government must come to an agreement on sequestration concerns, the debt ceiling, entitlements and benefit programs. Each of these items was pushed back in the interest of squeezing a last-minute deal through Congress. These items, no doubt, will be handled with another last-minute, poorly thought-out deal. VICA has no doubt that future deals will result in bad policy for small businesses. One need only look at the latest headlines detailing a “one trillion dollar platinum coin” to know that the circus is only just beginning. The Valley Industry and Commerce Association is a business advocacy organization based in Sherman Oaks that represents employers throughout the Los Angeles County region at the local, state and federal levels of government.

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