Legislative What’s the Fiscal Cliff? The
so-called fiscal cliff. For months, you’ve heard the media’s various
shorthand descriptions and characterizations, most likely as cryptic as
they have been hyperbolic. Extraordinary budgetary bungling and
procrastination. A ticking fiscal doomsday bomb. Political and public
policy brinksmanship, and an accountability dodge and deflection. A
flirt with a self-inflicted economic recession, if not outright
financial suicide. Or perhaps an altogether overblown year-end pretense,
much like Y2K turned out to be.
Certainly some, if not most, of
these descriptions to some degree fit the perplexing fiscal policy
predicament looming over Capitol Hill. But they don’t together
sufficiently explain what the impending fiscal cliff is and what it
means for everyday Americans and community bankers on Main Street far
outside the Washington Beltway. The 112th Congress reconvenes today to
begin its brief post-election lame duck session to attempt, once again,
to fix the problem.
So today, ICBA begins a short four-part
series on the fiscal cliff—to cover what it is, what harm it could
cause, what Congress might do to avoid it and what community bankers
should consider doing in response.
First up—what is this fiscal cliff?
the simultaneous and cumulative effect of expiring tax and spending
laws and automatic government spending cuts starting on Jan. 2, 2013.
The resulting rise in federal tax revenue and fall in government
spending would be correspondingly applied to reduce federal budget total
debt and annual deficit, now at $16 trillion and $1.2 trillion,
respectively. Many of the sun-setting federal tax cuts and exemptions
were initiated by the bundle of Bush-era tax measures, and the mostly
across-the-board government spending cuts are dictated by the Budget
Control Act of 2011, the stopgap measure that ended a congressional and
White House impasse over the raising the national debt limit and
reducing the government budget deficit.
Should Congress fail to
act by New Year’s Day, the fiscal cliff is projected to generate more
than $2 trillion worth of converging federal tax increases and
government spending cuts and savings—again, producing the corresponding
decrease in federal budget debt and deficits—that will gradually take
effect over the next decade, according to the Congressional Budget Office.
About two-thirds of the fiscal cliff involves tax increases, and one-third contains government spending cuts. In 2013, Americans will pay about $400 billion in additional personal and business federal income taxes, and more than $200 billion in budget cuts and new program revenues savings will reduce projected federal government spending, allowing the current federal deficit to be reduced by about half.
On the tax front,
without congressional action, the expiring Bush-era tax rates would
generate the largest tax revenue under the fiscal cliff, including about
$220 billion in 2013. Another $95 billion in tax revenue increase will
come from ending a temporary 2 percent payroll tax relief provided in
2010. About $65 billion from various other tax reductions or exemptions,
and $18 billion in tax revenue are estimated to come from Affordable
Care Act health care taxes on high-income earners.
The major tax measures that will affected by the fiscal cliff starting in January include:
Personal income tax
rates will return to pre-Bush ere rates, increasing from 10 percent to
15 percent for the lowest rates and from 35 percent to 39.6 percent for
the highest rates.
Payroll tax rates will revert back to 6.2 percent from 4.2 percent on a person’s first $110,100 wages.
Alternative minimum tax
measures that avoid inflation adjustments that have been routine in the
past will cause more than 30 million individuals and households to pay
more taxes. Many individuals and households making $33,750 and $45,000
respectively will fail to escape the tax if routine inflation
adjustments made to the AMT.
Capital gains tax rates will increase from 5 percent to 15 percent depending on a person’s income, to 10 percent and 20 percent.
Dividend tax rate will increase for most taxpayers from 15 percent to 39.6 percent.
Affordable Care Act
taxes are set to take effect for many high-income earners, aimed at
individuals making $200,000 or more a year and households earning
$250,000 or more annually.
Marriage penalty relief tax will expire, causing many dual-income couples to pay more in taxes.
Estate tax rates will increase 55 percent from 35 percent, with the current $5 million tax exemption falling to $1 million.
Child tax credit will decrease from $1,000 per child, to $500 per child. A refundable portion of the credit is also reduced.
the government-spending front, the Budget Control Act imposes
across-the-board cuts (the sequestration cuts) on defense and certain
non-defense programs as well as caps on government spending rate
increases through 2021, according to the CBO.
growth caps, targeting “new discretionary budget authority,” are
projected to limit the budget increases to 1.8 percent per year on
average. The act also accounts toward budget deficit reduction another $100 billion in 2013 and subsequent years from various new government program revenues primarily from anticipated economic growth.
However, about 70
percent of the federal budget is shielded completely from automatic cuts
under the Budget Control Act, including Social Security and Medicaid
programs and federal pensions and veterans’ benefits. The Medicare
benefits will be limited to a 2 percent spending reduction.
Nevertheless, budget experts estimate that more than 1,000 government programs will
be affected by the Budget Control Act cuts. Other spending reductions in
2013 with potential political implications include federal unemployment
payments allowed for up to 99 weeks, from 26 weeks, that will expire—a
$26 billion budget line item potentially affecting more than 2 million
people. A so-called Medicare Doc Fix expires, which curb payments for
physician services by 27 percent, will cut budget spending another $11
There are various perspectives on what effects of these
fiscal cliff budget spending cuts and tax increases will impose, most of
them negative. So tomorrow in ICBA’s fiscal cliff series: What might
happen if Congress fails to act? Read the CBO Report.
Congress Senate Banking Announces Hearing on Impact of Basel The Senate Banking Committee has scheduled a hearing on the “Oversight of Basel III: Impact of Proposed Capital Rules” for Wednesday at 2:30 p.m.
The witnesses will be Michael S. Gibson, director of the Federal Reserve’s division of banking supervision and regulation, John Lyons, Office of the Comptroller of the Currency’s chief national bank examiner, and George French, the FDIC’s deputy director of policy for the division of risk management supervision. Additional witnesses may be added at a later date.
Regulators Agencies Declare Delay in Basel III Implementation In
light of the volume of comments received and the wide range of views
expressed during the Basel capital requirements rule comment period, the
agencies (FDIC, OCC and Federal Reserve) announced that the proposed rules are unlikely to become effective on Jan. 1 as planned.
members of the Basel Committee on Banking Supervision, however, the
agencies said they take seriously their internationally agreed timing
commitments regarding the implementation of Basel III and will continue
to work to complete the rulemaking process. The agencies said they will
take operational and other considerations into account when determining
appropriate implementation dates and associated transition periods.
has continued to call on regulators to exempt community banks from
proposed Basel III capital rules and to allow community banks to
continue operating under Basel I capital regulations. For more
information and resources on Basel, visit the Basel resource center.
Fed’s Duke: Community Banks Important to Mortgage Market Along with announcing the delay of Basel III capital rules implementation, Federal Reserve Governor Elizabeth Duke expressed deep concern with a one-size-fits-all approach to mortgage lending during last week’s annual Community Bankers Symposium sponsored jointly by the Federal Reserve Bank of Chicago, the Office of the Comptroller of the Currency and the FDIC.
“I am convinced that the best course for policymakers would be to abandon efforts for a one-size-fits-all approach to mortgage lending,” Duke said. “Balancing the cost of regulation that is prescriptive with respect to underwriting, loan structure and operating procedures against the lack of evidence that balance sheet lending by community banks created significant problems, I think an argument can be made that it is appropriate to establish a separate, simpler regulatory structure to cover such lending.” Read more.
FDIC Releases Pre-Exam Tool at Community Banking Meeting At last week’s meeting of the FDIC Advisory Committee on Community Banking, the FDIC announced a new online pre-exam software called “ePREP” designed to enable the agency to streamline its pre-exam document requests from banks. The agency says its new online approach, which is still being developed, will use exam “filters” to ensure that only necessary documents are requested. The FDIC plans to roll out ePREP sometime in the first quarter of next year.
The Advisory Committee, which includes ICBA members Rebeca Rainey (chairman and CEO, Centinel Bank of Taos, N.M.), Jack Hopkins (president and CEO, CorTrust Bank, N.A., Sioux Falls, S.D.), Joe Pierce (president and CEO, Farmers State Bank, Lagrange, Ind.) and Betsy Flynn (president and CEO, Community Financial Services Bank, Benton, Ky.), was also briefed on the FDIC’s Community Bank Initiative and the feedback from the FDIC’s six regional community bank roundtables. FDIC staff said that community banks raised a number of concerns at the roundtables including problems with raising capital, margin compression and lowers earnings, technology concerns, and the possible expiration of deposit insurance for noninterest bearing deposit accounts. The agency plans to release the final results of its Community Bank Initiative in December.
OCC’s Curry on the Importance of Effective Risk Management During last week’s Community Bankers Symposium in Chicago, Comptroller
of the Currency Thomas Curry spoke on the importance of effective risk
management for community banks, including enterprise and operational
risk management. “A strong risk culture is proactive, and it drives the
way your bank sets strategy and makes decisions,” Curry said. “It also
translates into how your management team and employees anticipate and
respond to risk throughout the bank.”
Curry also added that the
OCC is not requiring community banks to have the types of sophisticated
models and processes expected from larger institutions. “What we really
want to see is community banks considering some form of stress testing
or sensitivity analysis of your key loan portfolios on at least an
annual basis,” he said. Read more.
Consumer ICBA Renews FDIC Money Smart Agreement The ICBA announced last week that the association has renewed its agreement with the Federal Deposit Insurance Corp.’s updated Money Smart financial education program, which helps banks promote financial literacy within their community. As part of the agreement, ICBA will continue to make its members aware of this free program—furthering ICBA’s commitment to financial literacy amongst community bank customers.
FDIC’s Money Smart program is a complimentary educational program designed to bring more consumers into traditional banking relationships. The modernized curriculum has tracks for adults, young adults and small businesses. Because of its design, Money Smart has specific training modules, in nine languages, which can be used to fill in the gaps from other financial education programs. ICBA has been using Money Smart and involved with FDIC’s program since November 2002. Read the release.
Economy Wholesale Inventories Up 2 Percent Wholesale inventories rose 2 percent in September and were up 4.4 percent from a year ago, according to the Commerce Department. Sales of durable goods were up 1.2 percent in September and were up 2.8 percent from last year.
Poll Take This Week’s Quick Poll Take this week’s Quick Poll on the Go Local holidays campaign, and view results from the previous poll on the new format of ICBA NewsWatch Today. View the Archive. View the Archive.