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Getting over the cliff

SoVaNow.com / December 13, 2012
I hate to waste precious mental energy on the fiscal cliff nonsense — sorry, but that’s all it is — but this week I ran into someone who offered that his co-workers are really, really worried about having to pay an extra $2,000 in taxes next year if Washington can’t hash out a deal. While such fears are almost surely unfounded, they do exist, and expectations unto themselves can have a bad effect. It would be a shame if people dropped into a defensive crouch, pocketbook-wise, just as the economy has begun to show some signs of life.

As cliffhangers go, the fiscal cliff is pretty unexciting, so pardon me while I attempt a (somewhat) quick deconstruction of the issues involved. The fiscal cliff refers to a pullback in government spending and expiration of tax cuts that, if allowed to kick in in full, would almost certainly tip the economy back into recession. You have, for starters, the termination of the 2001 Bush tax cuts, which for a variety of reasons (mostly having to do with their unaffordability) were scheduled to expire after 10 years. That would have happened in 2011, but after the 2010 midterm elections President Obama worked out a deal with Congress to extend the Bush tax cuts for two more years. In return, the White House got Congress to agree to a temporary cut in the payroll tax (which funds Social Security and Medicare) and an extension of unemployment insurance benefits.

On the spending side, Democrats and Republicans agreed to what was called the “sequester,” a suite of automatic spending cuts that were supposed to take effect if both sides failed to negotiate a long-term budget deal. The idea of the sequester was to include spending cuts that neither side could stomach — slashing the military for the Republicans, health care for the Democrats — in the hope of prodding both sides into action. They had two years to work out a compromise, right? Well, here we are, and unlike 2010, now it’s Democrats who are coming off a big electoral victory and the top Republican in Washington — Speaker of the House John Boehner — has nothing to fall back on but his crying towel.

About that $2,000: that’s the extra tax bite someone making $30,000 or $40,000 a year might pay if tax rates were allowed to return to Clinton-era levels. But of course, no one is suggesting such a thing should happen. Obama’s position, echoed by just about every Democrat in Washington, is that income tax rates should remain exactly where they are except at the top bracket — which dings only those folks making $250,000 a year and up. These taxpayers, instead of paying a top rate of 35 percent on income above $250,000, would pay 39.6 percent. The rest of America — the other 98 percent — would see no change at all. You might be thinking to yourself by now that this sounds like an incredibly easy dispute to resolve, but this is Washington we’re talking about.

The big hang-up is the Republican Party doesn’t want tax rates to go up for the well-to-do, and if anything should be done to bring down the deficit (which the sequester is supposed to do), well, um, dunno, go hike the Medicare eligibility age or kick people off Medicaid or whatnot. It is certainly true that higher taxation of upper-income Americans alone can’t solve the deficit problem, but it’s not chump change, either: The White House has proposed raising $1.6 trillion over 10 years by eliminating the top-end Bush tax cuts and raising rates on capital gains and dividends to come in line with the rest of the tax code. (The favorable tax treatment of capital gains, inheritances, investment income and other types of wealth that apply mostly to the very rich in America is a national disgrace. Think Mitt Romney and his effective tax rate of 13 percent, less than the elevator operator at his car garage.)

So, then, what’s happening in Washington is that lower taxes for 98 percent of Americans are being held hostage by GOP demands that the top 2 percent of taxpayers get their cake and eat it, too. (Taxpayers in this bracket were the biggest winners under the Bush tax cuts, after all.) There are lots of other issues that get mixed up with the so-called “cliff,” but the top marginal tax rate has been the biggest stumbling block to a deal. And by the way, if you haven’t gotten used to the hostage metaphor being tossed around every time there’s a dustup in Washington, let’s just say the next four years are likely to be long ones indeed.

The arithmetic required to strike a deal on taxes and spending isn’t very complicated, but the politics are, and, true to form, politics is all that is preventing a resolution to this so-called crisis as we head into 2013. The Republicans are holding a weak hand, and sooner or later one-card-monte John Boehner is gonna fold, but it remains to be seen whether it’ll happen before or after Congress goes over the cliff (please pretty please). Which leaves the most ridiculous part of the entire story: People say they want to fix the deficit, but they go nuts over the fiscal cliff, which is nothing more than a set of austerity measures which putatively reduces the deficit.

Of course, raising taxes and slashing spending would be terrible for the economy at this vulnerable time, and it’s probably stupid as a deficit-fighting measure, too, as reversing economic growth, however halting, is very bad for budgets. Yet it’s also true that the cliff is really more like a molehill, in that nothing would happen after the first of the year to destroy the economy even if we do go over the edge. Congress would still have time to fix tax rates, and it could even make changes retroactive to the start of the year should April 15 prove to be too challenging a deadline for the geniuses on Capitol Hill. Meantime, the sequester’s spending cuts would land like a brick on the heads of those most dependent on government largesse — defense contractors, hospital chains, pretty much everyone in northern Virginia — which, of course, also would be bad for the economy as a whole. As it happens, though, incentives for action under our system of government do start to kick in when the CEOs of defense firms get on the phone screaming at their congressmen, wanting to know why their government payments haven’t been mailed out yet.

Like I said, I wouldn’t worry too much about the fiscal cliff ….

***

Here in Virginia, meantime, the governor seems to have to come to the conclusion that something must be done to drum up dollars for transportation. And no wonder: By 2017, the Commonwealth runs out of money to build new roads, bridges and rail. Nada. Nothing. Every dime coming in from the gas tax will go toward routine highway maintenance and upkeep. The state will even run dry of money for matching federal transportation grants. How broke is that?

Gov. Bob McDonnell has spent most of his term dancing around Virginia’s transit funding mess, either making a big to-do out of such mini-measures as scraping VDOT cash reserves dry or proposing grand schemes that no one likes, such as selling off the state’s ABC monopoly. Then there’s McDonnell’s fascination with toll roads and privatization schemes, which people hate even more. To paraphrase the Grinch: The tolls, the tolls, the tolls …. That’s a funding source people can’t stand in the least.

The speculation out of Richmond is that McDonnell plans to throw his support behind legislation that would index the gas tax to inflation, which would raise a decent sum of cash for VDOT’s budget, though not nearly enough. McDonnell is promising a $500 million-a-year plan, which maybe is half of what’s needed to update Virginia’s transportation system. It might be a third. Or less. Yet any action by the governor to challenge the dogma within his party that taxes cannot ever go up, for any reason, is welcome. Whether his party compatriots in the General Assembly will go along with the governor remains to be seen.

No one likes higher taxes, but services aren’t generally free, roads least of all. The standard argument you hear in Southside Virginia is that transportation is a Northern Virginia/Hampton Roads problem, so let them pay the freight, but this ignores the fact we need tax receipts from these wealthier areas of Virginia to support services of our own, such as public education. The well-being of Southside Virginia is tied up with the rest of the state, and stalled growth in Northern Virginia because no one can travel 10 miles in under a hour is a problem for us as well as for them. It’s not for nothing that Virginia fancies itself a Commonwealth, with shared benefits and shared burdens.

Besides, how many toll roads can Virginia stand?















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