With less than a month to go before the so-called onset of the “fiscal cliff” on January 1st, it is worth a snapshot of what the implications would be for the Latino community if an agreement is not reached between the White House and Congressional Republicans.
In general terms, if nothing is done, come January 1st, automatic tax increases and spending cuts totaling over $600 billion will kick in. Roughly two-thirds of the total will come from an expiration of a variety of tax cuts with the remainder coming from cuts to defense spending, unemployment insurance and other programs. This was all put in place with the Budget Control Act (BCA) of 2011 in an effort to force Congress and the Executive branch to address our unsustainable deficit and the growing national debt.
According to the U.S. Census Bureau, the median household income for Hispanics was a little over $38,000 in 2010. This family would see a tax increase in 2013 of over $1,200, from an expiration of the Bush-era tax cuts and the 2009 stimulus, an expiration of the payroll tax holiday (going back to 6.2 percent from the current 4.2 percent) and other reductions that are set to be eliminated. For those earning a bit more, they face the prospect of being hit by the Alternative Minimum Tax (AMT). The AMT had been put in place in the 1969/1970 to ensure wealthier Americans paid a minimum tax, but it never included a provision for inflation. Regular “patches” have been implemented, with the most recent raising the AMT to $74,430. However, without a fresh “patch” the level will revert back down to $45,000 pulling in an estimated 31 million taxpayers from the current 4 million.
Hispanic-owned small businesses (with 10 – 100 employees) earned an average $5.8 million in annual revenue with 22 employees. Most file their taxes as “pass-through” entities, meaning they file their business and personal taxes together. Seventy-five percent of small businesses are organized as “pass-through” entities and 54 percent of the private sector workforce is employed by these companies. The tax increases about to take effect will impact the these companies by taking margin rate from the current 10 – 35 percent range to where they were prior to 2001 (15 – 39.6 percent). Also, many of the tax incentives for small business would disappear, including tax breaks for research and development, depreciation of capital investments, and deductions for business start-ups. Additionally, the spending cuts as part of the “sequestration” portion of the BCA would directly hit Hispanic-owned companies involved in government contracting. Lastly, the increases in long-term capital gains would stifle the ability of these businesses to conduct mergers, acquisitions and sales of portions of their companies.
So what does this mean to the typical Latino worker or business owner? Fundamentally, going over the fiscal cliff would slam the brakes on our economic growth which is already fragile and anemic. Private sector companies would curtain investments and hiring. A recent report by Ernst & Young indicated a likely decline 2.4 percent in investment and 710,000 fewer jobs being created. Ninety percent of all American taxpayers will pay more in 2013 and we will likely see another recession in the first half of the year.
Having completely depressed everyone, I should say that I remain optimistic that leaders on both sides will come to an agreement prior to December 31st so we can avoid falling into the abyss of the fiscal cliff. Sadly, the way things have operated in Washington over the last few years, our elected officials wait until the last-minute to get important things done for the American people. However, as the saying goes, “the most productive minute is the last one.”
Danny Vargas, President of marketing consulting firm VARCom Solutions and Co-Chair for the campaign Juntos con Romney in Virginia. Former Commissioner, National Museum of the American Latino Commission, Former National Chairman of the Republican National Hispanic Assembly, regular MSNBC contributor, U.S. Air Force veteran raised in NYC.