'Fiscal cliff': Impacts could be widespread

ST. PAUL -- Americans could see their federal tax bills increase, in some cases dramatically. People who depend on federal programs may not receive services or funds they expect. Rural doctors could see payments drop. With businesses reluctant to spend money in uncertain times, finding jobs may be harder. The stock market could tumble. A recession may begin.

Those are a few of the things that could happen if political leaders cannot fix the federal budget, debt, spending and tax problems collectively known as the "fiscal cliff."

On the other hand, federal leaders could agree to continue the status quo, or something like it, and make big decisions in a few months.

The first thing most Americans would notice if there is no agreement is a smaller paycheck in January, Minnesota State Economist Tom Stinson said.

"They will just go ahead and spend the way that they were spending," Stinson said. "But the second paycheck and the third paycheck, they are going to say, 'Wait a minute, I am making less money.'"

Stinson fears those smaller checks could start a downward spiral with spending slowing, hurting businesses that then would restrict hiring and buying. That, in turn, would further affect businesses and workers.

Even the publicity the fiscal cliff now receives is starting that spiral.

"People begin to get a little bit stirred up," Stinson said about when the public hears talk of economic problems. "Then it makes sense to cut back on your spending a little bit and build up your personal rainy day fund."

The biggest problem if the country steps off the cliff, Stinson said, would come from a variety of tax increases on Jan. 1. Most Americans would experience higher income taxes when tax cuts dating from the George W. Bush administration expire. But lots of other taxes also are scheduled to rise.

Even though federal programs would experience automatic budget cuts Jan. 1, Stinson most worries about the tax increases, which could send the country into a recession.

For those who depend on federal funds, that part of the fiscal cliff also is troublesome.

"That (chunk of money) is a huge part in keeping us going," said Pam Reese, director of Duluth Head Start programming. "In Duluth, that could mean a couple of teachers, a couple of paras (paraprofessionals). Those are real conversations we have had to have."

Head Start throughout Minnesota would face an 8.3 percent cut, she said, which could mean $6 million in funding cuts. That would mean losing 1,000 students and 220 staff members.

In Duluth, it could mean shutting down an entire site and shifting students to other sites.

Doctors, especially in rural areas with lots of elderly patients, could see their Medicare revenue drop 27 percent.

"Mayo Clinic is very concerned about the impact of the fiscal cliff on the economy and health care in particular," said Asia Christenson, public affairs manager for three southeast Minnesota Mayo locations.

Christenson said that since Mayo is one of the largest Medicare providers in the country "we want to be constructive and will offer Congress some concepts as they seek a long-term solution to sustainable growth rate.

In Red Wing, schools receive about $920,000 of federal funds in a nearly $28 million budget.

"I would be concerned about trickle down through the state, too, if due to cuts that hit there, we could also take an indirect hit," said the school's finances and operations director, Brad Johnson.

Cuts should be no surprise.

Sen. John Thune, R-S.D., made that fact clear in talking to reporters.

"It cannot be a function of just raising taxes," he said about fixing budget problems.

"People are going to have to realize we are going to have to make some cuts," U.S. Sen. Amy Klobuchar, D-Minn., said.

One of the little-discussed impacts of the fiscal cliff would "be tragic," Thune said. The estate tax, which Republicans like to call the "death tax," would affect more farmers and small businesses beginning Jan. 1 if nothing is done.

The tax is collected on farm and business estates after an owner dies. It now applies only to estates of more than $5 million. On Jan. 1, that would fall to $1 million and the tax rate would jump from 35 percent to 50 percent.

The $5 million level may seem like a lot, Thune said, but farmers, ranchers and small business owners have a lot invested even if their incomes are not large.

More than 70 percent of South Dakota cropland would be affected by the higher taxes, Thune said, while little is now affected.

The impact on state budgets varies greatly. But in many cases governors' proposed budgets released in December or January may need to be updated based on federal fiscal cliff actions.

To illustrate state-to-state differences, one can look at federal grants. South Dakota is the most vulnerable state, in part due to the high number of grants it received for programs such as those dealing with American Indian issues.

While more than 10 percent of South Dakota's federal grants would be endangered, Minnesota is the state with the third least vulnerability, with just 5 percent of grants in danger.

In Wisconsin, 5.5 percent of federal grants could be in danger, while the figure is 6.6 percent in North Dakota.

A contradictory aspect of the cliff comes from a Pew Center on the States report indicating that most states could collect more taxes if federal taxes increase. Experts like Stinson say that actually would not give states more money because the fiscal cliff in general would lead to fewer taxes because of job losses.

Stinson said that it appears businesses already are slowing down, concerned about what may happen with the economy.

"Kicking the can down the road until July doesn't change anything," Stinson said, other than delaying business decisions to hire and buy products.

Even if federal officials delay a decision just two months, Stinson said that a recession is possible.

The Medicare payment reduction is one of the least-known fiscal impacts.

Terry Hill, executive director of the Duluth-based National Rural Health Resource Center, said if the "doc fix" goes away it will especially hurt rural areas.

Hill spent part of Wednesday in webinars with the American Hospital Association and the Federal Office of Rural Health Policy and came away thinking that won't happen.

"There have been these threats to physician Medicare payments for years, and the government and the policymakers have always backed off of them in the past," Hill said.

But if it did happen, rural health care would be hit particularly hard, Hill said. That's because Medicare makes up a larger portion of the caseload in most rural areas than in urban areas.

"It could be that it might prompt (physicians) to leave rural areas," Hill said. "A good part of their income comes from the Medicare patients. In suburban Minneapolis, it might not hurt as much."

A cut in reimbursements also might cause some physicians to see fewer Medicare patients, Hill said. But that probably wouldn't happen in long-established rural practices.

"Because of that personal connection, we sometimes take advantage of these rural providers," Hill said. "I doubt very much that they'd turn (patients) away."

What Congress really needs to fix are state-to-state discrepancies in Medicare payments, Hill said. For instance, Florida reimbursement rates are much higher than those in Minnesota.

"If I'm doing an appendectomy in Duluth, I'm getting paid maybe half of what that physician is paid to be doing an appendectomy in Miami," Hill said. "The Miami docs are getting paid a good 40 to 50 percent more for doing exactly the same thing. It's been that way for years and years."

The playing field needs to be leveled, Hill said, "but I don't think they have the political guts to do it."

The Duluth News Tribune and Red Wing Republican Eagle contributed to this story.