How the Fiscal Cliff Deal Will Impact Homelessness

written by Steve Berg
January 2, 2013

Last night Congress passed a bipartisan bill that eliminates or postpones many aspects of the “fiscal cliff.” President Obama is expected to sign the bill shortly.

As readers of this blog are no doubt aware, the fiscal cliff was made up of different federal laws that would have taken effect around now that would have either raised taxes or cut spending in a number of different areas, including programs important to ending homelessness. The Congressional Budget Office found that, if all these measures took effect on schedule, it would have sent the economy back into a recession and substantially increased the unemployment rate.

For people working on homelessness, here are some of the important things the new bill does.

  • The bill postpones the across-the-board spending cuts of “sequestration” for two months. Previous legislation had mandated across-the-board cuts to fiscal-year 2013 domestic spending of about eight percent, along with similar cuts to the military budget, to take effect today. Many programs important to low-income people are exempt, but virtually all programs under the Department of Housing and Urban Development (HUD) are not exempt and would have been cut by sequestration. This would have had an immediate impact on Section 8 and public housing, which in most locations have already begun spending FY 2013 funds. Eventually, it would have had a similar impact on virtually all HUD programs.  Most programs under the Department of Health and Human Services (HHS) and other grant programs would have been impacted as well. The Alliance predicted that sequestration’s cuts to HUD homelessness programs would have meant homelessness instead of housing for 145,000 people. And it still might.

Unlike many of the spending cuts or tax measures, which provisions in the new bill either extended for a year or made permanent, sequestration was delayed for only two months, until early March. The exact details on the impact at that point are not yet known. See What’s Next below for a glimpse at the hard decisions Congress and the Administration will face in March.

  • The bill allows the “payroll tax holiday” to end, which means that working people will see their Federal Insurance Contributions Act (FICA) withholding taxes increase from the 4.2 percent level of their income, instituted by the Recovery and Reinvestment Act of 2009, to the previous 6.2 percent level, effective immediately.
  • The bill extends the Emergency Unemployment Insurance benefits for another year. Without this deal, around 2 million people who are experiencing long-term unemployment would have lost unemployment benefits.
  • The bill extends temporary tax credits that benefit low-income people for a year. These tax credits, which include the Child Tax Credit, certain favorable provisions of the Earned Income Tax Credit, and others, were scheduled to expire.
  • The bill extends for one year the medicare “doc fix,” which provides higher reimbursement rates for physicians under the Medicare program.
  • And of course the bill allows the nation to avoid (for now) some of the negative effects the fiscal cliff would have had on the economy and unemployment levels.

Right now the big headlines are around tax issues. For individuals with incomes up to $400,000 and couples with incomes up to $450,000, the bill made temporary income tax reductions permanent, while it allowed tax reductions for individuals and households with higher incomes to expire (effectively raising tax rates for higher-income individuals and households).

The bill made the “alternative minimum tax fix” permanent, which will prevent many middle-class households from paying higher taxes, while at the same time instituting changes in some deductions and favorable tax rates for capital gains for higher-income households, which will also have the effect of increasing their taxes.

According to the White House, the overall result is “the most progressive tax code in decades.”

What’s next

Sometime around the beginning of March, the federal government’s debt will again approach the debt limit that Congress has passed into law. Many members of Congress have said that they will vote for a measure to increase the debt limit only if the measure also cuts spending.

Also scheduled for March are the across-the-board “sequestration” cuts and the expiration of the temporary FY 2013 appropriations continuing resolution. All this will set the stage for another last-minute scramble, with some in Congress sure to push for big spending cuts that will put at risk the well-being of millions of the poorest and most vulnerable Americans.

Stay tuned over the coming weeks for more analysis from Alliance staff of the fiscal cliff deal and the potential standoff in March.