What's at Stake for Low-Income Individuals and Families in the Fiscal Cliff?

December 18, 2012

By Elizabeth Lower-Basch

Confused about the fiscal cliff?  No wonder since so much media coverage has focused on whether President Obama or the House Republicans have the upper hand, and not on what difference the policies they support will make in real people's lives, particularly low-income individuals and families.

Low-income people will be affected by many aspects of the fiscal cliff; however, they will be even more affected by some of the Congressional proposals to avoid the cliff.  The bottom line measure of any proposal should be whether it increases poverty and inequality.

If we go off the fiscal cliff:

  • Low-income people who are receiving federal extended UI benefits will immediately lose these benefits in January, if they are not extended. These unemployed people really do face a cliff.
  • Other effects are more of a "fiscal slope" than a cliff. Sequestration would cut spending by 8.2 percent for many programs that serve low-income individuals and families, including job training and education programs, Head Start, the Low-Income Home Energy Assistance Program (LIHEAP), and many more. However, the effects of these cuts would only show up gradually over time, if a deal was not reached.
  • While the payroll tax credit affects all workers, low-income people are more likely to live paycheck to paycheck, and thus will feel the loss of the payroll tax credit with their first paychecks.
  • Low-income people benefit from refundable tax credits like the Child Tax Credit, the Earned Income Tax Credit, and the partially refundable American Opportunity Tax Credit. These credits will either expire, or revert to lower levels, in the absence of an extension.

Overall, the fiscal cliff would increase federal taxes and cut spending significantly.  There is broad agreement that pulling this much money out of the economy in a short period of time would cut growth and raise unemployment.  However, these changes would not occur immediately.

Averting the fiscal cliff:

The law that created "sequestration" requires automatic, indiscriminate  across-the-board spending cuts to take effect unless Congress can identify $1.2 trillion in deficit reduction (taking place over the next nine years) to replace them.  There is generally consensus that this should come from a combination of increased tax revenues or reduced spending; the debate is largely about the balance of the mixture, and the specific proposals.   Because of the complexity of the issues, and the tight timeline,  if there is a deal, the President and Congress will likely agree to a smaller package of immediate deficit reduction, and the outlines of a plan for further action.

Critical supports for low-income people could be threatened in several ways:

Now is the time to make sure the President and Congress know that such cuts are unacceptable ways to balance the budget.  It is also important to make sure that any framework for deficit reduction that does not name the specific cuts, but simply lays out targets for future negotiations, include explicit protections for low-income populations. 

Moreover, the budget deal should not simply avert the harmful effects of the fiscal cliff, but also include concrete steps to improve the well-being of disadvantaged populations, who are at risk of being left behind as the economy slowly recovers.  This should include targeted job creation for low-income workers and disconnected youth.  Proposals to replace the payroll tax cut with the more targeted Making Work Pay Credit, such as the bill introduced by Senators Harkin, Udall and Sanders, should also be considered, as well as additional investments that would both support disadvantaged populations and boost the economy such as early childhood education.

As various proposals are put forward, there will be much discussion of how much revenue they raise, and how much spending they cut.  But the bottom line number should not be either of these, but whether they increase poverty and inequality.  

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