5 Ways the Debt ‘Stupor’ Committee Will Make You Poorer

Tasked with finding $1.2 trillion to cut in the federal budget, after summer�s playground antics that caused the markets to tumble and roll like a roller coaster, the 12-member congressional �super committee� — as expected — has turned into the �stupor� committee.

Monday was their deadline to send their plan to the Congressional Budget Office, and — surprise, surprise — the Dems and Reps released a joint statement of failure. But you can be sure that the rhetoric of blame has already begun. Even on Sunday, when unofficial statements suggesting no agreement had been made, the airwaves were filled with pointing fingers.

Business as usual in Washington. I�m not going to rehash the politics, as that won�t help you understand the importance of this failure. Instead, let�s look at how the inaction may negatively impact your financial situation.

First of all, a failure to pass the needed reductions will trigger $1.2 trillion in automatic spending cuts — half in defense and half in other programs. The good news is that the cuts won�t be enacted until 2013. The bad news is that gives Congress another year to play politics, running right up against the next deadline, probably failing to meet it too, and, most importantly, causing extreme market volatility. Just like we had last summer, which did investors no favors.

And that�s not all. Here are five additional non-investment ways your pocketbook might be affected:

• The United States’ deficit is currently estimated at $15 trillion — and growing! With no debt agreement, look for S&P to further downgrade our credit rating. You will remember that August�s downgrade from AAA to AA+ roiled the investment markets, doing investors no favors. The next downgrade most likely would be to AA, and you can bet on additional market turmoil, with investors fleeing for the sidelines. A downgrade also would require our government to pay more to investors in U.S. instruments, which will just add to our deficit.
• Cuts in Medicare payments to providers — as much as 30% — won�t immediately affect your pocketbook, but don�t believe those who say individuals won’t be impacted. Guess where the doctors are going to collect their extra money? That�s right — you and I eventually will pay higher co-pays, increased insurance premiums and other out-of-pocket expenses.
• For 2011, payroll taxes were reduced to 4.2%; if the cuts are not extended, the taxes will increase to 6.2% at the beginning of next year. The Center on Budget and Policy Priorities, a Washington think tank, has reported that the tax cut is worth an average of $934 to each of us. And RBC Capital Markets has forecast that the expiration of the cuts would reduce GDP in this country by 1% next year.
• The alternative minimum tax (AMT) needs patching — a normal end-of-year �fix� from Congress; but if there�s no agreement, more than 34 million middle-class taxpayers will get hit hard. It�s estimated that 45% of all households in 2012 — compared to 0.4% this year — that make $75,000 to $100,000 will pay the AMT. The AMT was enacted in 1969, and the problem was the original law did not take into account inflation. Consequently, middle-class members who never were intended to pay the AMT would pay through the nose without the Congressional extension of the exemption, which has continued for several years. Don�t expect the exemption if the politicos don�t come to agreement.
• A decrease in long-term unemployment benefits is coming. Currently, the chronically unemployed can receive benefits for up to 99 weeks. If no agreement is reached, the U.S. Labor Department estimates that 2.1 million folks will be dropped off the rolls by February 2012. It�s estimated by JPMorgan Chase that this occurrence would reduce GDP by 0.75%.

Those are the major effects for you and me. But there are many more that could make you poorer next year — in your personal finances, as well as in other areas that will affect you, directly or otherwise. They include losing your deductions for state and local sales tax and college tuition; businesses paying more taxes because they won�t be able to write off bonus depreciation allotments for new purchases or get tax credits for research (which hurt their bottom lines, preventing expansion and new product development); and less money for city, state and federal government funds to improve our decaying infrastructure (which dates back to the 1950s and is in dire need of repair and replacement).

So what�s an average taxpayer to do? Make your views known! Write, call, fax or email your representatives and senators and let them know that you don�t appreciate their political shenanigans that waste our time and money and place our country at risk of additional financial calamity.

I expect that we will see some short-term fixes, but nothing that really bridges the gap. But I always say, �It�s better to be prepared,� so don�t stick your head in the sand. Get out there and let your representatives and senators know what you think!