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Helmut Schmidt, Published November 17 2012

A leap off fiscal cliff means jump in North Dakota, Minnesota taxes

FARGO – A North Dakota family of four earning $84,896 could pay $4,825 more in taxes in 2013 than they did in 2011 if Congress and President Obama take the nation into a running leap off the so-called “fiscal cliff.”

That ranks North Dakota at No. 6 in the country for the impact of tax hikes if lawmakers fail to cobble together a tax plan and spending cuts, a Tax Foundation study said.

Meanwhile, a Minnesota family of four earning $87,319 could end up paying another $4,382 in income taxes, the study said. That ranks it at 24th in the nation.

Taxes will leap for every individual and many businesses, but particularly so for upper middle-class and wealthy taxpayers, if Bush-era and Obama tax cuts expire and the Alternative Minimum Tax isn’t readjusted, economists say.

If tax rates roll back to old levels, Americans will pay $514 billion more in taxes in 2013 compared to this year, the Tax Foundation reports.

That includes $36 billion in new taxes to pay for the Patient Protection and Affordable Care Act, nicknamed Obamacare.

Meanwhile, $109 million in automatic spending cuts to domestic and defense programs – made by a process called sequestration – could affect a wide range of programs, some as soon as Jan. 2.

It’s the economic equivalent of the perfect storm.

Significant cuts

Essentia Health, which has hospitals and clinics in North Dakota, Minnesota, Wisconsin and Idaho, including Fargo, could lose $40 million in payments, estimated Mike Mahoney, vice president of public policy.

Mahoney said the health group could lose out on

$29 million in physician fees, $5 million in reimbursements for mid-sized hospitals in areas such as Detroit Lakes and Brainerd, Minn., and $6 million as part of the 2 percent sequestration for Medicare reimbursement.

“It adds up very quickly, and it’s a real challenge for us,” he said. “We’re very hopeful that we have a productive lame duck session.”

The Fargo School District could lose $750,000 in funds in fiscal year 2013 if the budget impasse continues into October, Superintendent Jeff Schatz said.

Those funds go for federal programs for low-income students, to hire and train teachers and principals, and for career and technical education, he said.

Similarly, West Fargo School District was told by the state Department of Public Instruction it could lose $233,500 in various federal funds, Business Manager Mark Lemer said.

School nutrition program funds are exempt from automatic cuts, the Congressional Research Service reports.

School districts that could see aid cuts Jan. 2 get Impact Aid. Those districts have a lot of Native American students, students whose parents work on military bases, or federal land near their districts, Education Week blogger Alyson Klein reports.

A gap to be closed

Of the $3.63 trillion in federal spending planned for fiscal year 2012, about one-third of it is financed by borrowing, the Congressional Budget Office reports.

The sequestration cuts planned for fiscal year 2013 hit defense and domestic budgets equally, with about $55 billion taken from each.

E Most defense programs would see 9.4 percent cuts, except those that are specifically exempted. A handful of defense programs would see 10 percent cuts.

E Medicare would get a 2 percent cut in provider payments. Recipients won’t be affected.

E Domestic discretionary spending – such as scientific grants and Education Department programs – would be subject to 8.2 percent cuts.

E Most mandatory domestic programs – those that are funded based on eligibility – would be trimmed by 7.6 percent.

Also as part of the equation, Congress and Obama will have to agree on whether to raise the nation’s debt ceiling, and if so, how much.

As of Aug. 15, the federal debt was $15.9 trillion, with the debt limit set at $16.4 trillion, CBO said.

Social Security, Veteran’s Affairs programs, Pell Grants, military pay, children’s health insurance, crop insurance, and pay and benefits of Congress and the president are among 149 exempt programs, the Office of Management and Budget reports.

Unsure of local effects

County and city officials on both sides of the Red River are unsure of the local effects of sequestration.

Kent Costin and Wanda Wagner, the finance directors for Fargo and Moorhead, respectively, both expect the cuts would land in development and housing programs.

Community Development Block Grants would be cut $242 million nationwide; homeless assistance $156 million; and other housing programs more than $82 million.

Clay County Administrator Brian Berg said social services could be particularly hard hit.

If federal dollars are cut to services mandated by the state, he said the county might have to make up the difference.

“How we go about doing that certainly would be of concern,” Berg said.

Capt. Dan Murphy, a spokesman for the North Dakota National Guard, said “there’s just no answers there right now,” on the breakdown of what sort of cuts the Guard will see.

At North Dakota State University, Communications Coordinator Anne Robinson-Paul said most of the school’s federal money comes in financial aid, research grants and contracts.

“We’re just waiting to see,” she said.

For Minnesota State University Moorhead, the worry is what cuts would do to financial aid, and what tax hikes would do to the ability of students and parents to pay for school.

“That would impact enrollment. And for us, enrollment makes up about two-thirds of our budget,” said David Wahlberg, MSUM executive director of marketing and communications.

‘Cliff’ diving dangerous

Local economists disagree on when and where the biggest hits to the nation’s economy will occur from continued gridlock in Washington.

But they agree that if the federal government is allowed to leap off the fiscal cliff like a ginormous fiscally irresponsible lemming, it could generate long-term problems.

“The implications of them actually going and diving off the cliff are tremendous,” said Greg Stutes, director of the Center for Economic Education at MSUM.

Few economists believe the tax hikes and sequestration cuts would not put the country back into a recession, he said. That recession could be even worse than in 2008, Stutes said.

Stan Herren, a professor in the agribusiness and applied economics department at North Dakota State University, expected the biggest impact to be in taxes, particularly if the Alternative Minimum Tax reverts to a higher rate.

“That would catch an awful lot of middle class families,” he said. “I don’t think many of my colleagues realize how many of them will be caught in the AMT.”

Herren said the effects wouldn’t necessarily hit hard right away. He expected the “cliff” would be more like fiscal slope.

A major problem is the uncertainty that can roil the markets and shake confidence in the U.S. government to pay its bills, he said. Herren said we’ve already been seeing that reflected in the slow economic growth in the second half of this year.

“I guess my real concern is that we’ll take another temporary fix to our long-term fiscal problems,” he said. “We need to realize that we have this short-run fiscal cliff, but we really need to take a look at fiscal problems in terms of long-term economic growth. That will take some sort of grand bargain.”

Stutes warned that doing that will require some finesse in cobbling together a plan to control spending and taxes without triggering a recession.

“There is a teeter-totter effect going on here.”

“Don’t go into this aggressively now,” Stutes said. “Wait until the economy is a little more stable, a little more stronger. Then get more aggressive.”

Sen. John Hoeven, R-N.D., counts himself among those who want to find a bipartisan plan that works.

His preference is to have a plan that closes tax loopholes, limits deductions and holds tax rates or brings them down. He said that should spur the economy and eventually bring in more in taxes to help cut the nation’s budget deficit.

“I think there’s definitely room to come to an agreement,” Hoeven said.

Stutes expects Congress and Obama to come up with a deal to keep the government running.

But if they don’t, he said voters will find some new representatives.

“We just went through an election where nearly 50 percent of the people were unhappy. If we go over the cliff, it’s going to be closer to 100 percent of the people unhappy,” Stutes said.


Readers can reach Forum reporter Helmut Schmidt at (701) 241-5583