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Sonoma County weighs in on 'fiscal cliff' repercussions

Published: Saturday, December 29, 2012 at 3:02 p.m.
Last Modified: Saturday, December 29, 2012 at 3:02 p.m.

If the country heads over the fiscal cliff Tuesday, Californians will be slapped simultaneously with a slew of federal tax increases and higher state income and sales taxes from Proposition 30.

Absent a last-minute deal, the federal tax increases alone will hit the average family with more than $3,500 in higher taxes in 2013.

“I'm totally worried,” Julie Stites, a 40-year-old nurse practitioner and mother of two from Penngrove, said Friday. “It makes a huge difference to us.”

The increases set to hit Jan. 1 could plunge the nation back into a recession just as it seems to be clawing its way out of a three-year economic morass, said Stites.

“I feel like we're getting kicked again,” she said.

Also, extended federal unemployment benefits are set to expire for 400,000 Californians if no deal is struck.

The benefits have been extended several times as the unemployment rate remained stubbornly high following the last recession. But in November, the state Employment Development Department sent out notices that benefits for more than 6,600 North Coast residents would expire Dec. 29.

In Sonoma County, 4,140 people are set to lose benefits. In Napa County, payments are ceasing for 996 workers. In Lake County 755 people are affected, 728 in Mendocino County.

Officials in Washington continued last-ditch efforts to avert or soften the most damaging measures of the cliff, which in addition to steep tax increases includes about $1.2 trillion in federal spending cuts over the next 10 years.

Retired nurse Carol Rivkin of Santa Rosa said she believes a deal will get worked out, if not by Jan. 1 then soon thereafter.

“I still have faith they are going to do it,” said Rivkin, 68.

If they don't, however, Rivkin says she's not sure what the impact would be on her. As a retiree, she doesn't have the same level of income she once did, but she does worry about continuing to qualify for certain tax exemptions, like the mortgage deduction.

“I'm a little confused as to what's safe and what isn't,” Rivkin said.

What is clear is that without a deal, the list of state and federal tax increases that would go into effect Tuesday is daunting.

Proposition 30, Gov. Jerry Brown's voter-approved effort to help balance the state budget by generating new revenue for school funding, triggers two separate tax increases.

The base state sales tax rate will increase a quarter of a percent, from 7.25 percent to 7.5 percent, for four years. That means a $100 jacket will cost an extra quarter, a $30,000 car will cost an extra $75.

State income tax rates will go up for people making more than $250,000 per year. Currently, all single filers earning more than $48,000 and all joint filers earning more than $96,000 pay a marginal rate of 9.3 percent. Prop. 30 created a 10.3 percent rate for single filers earning $250,000 to $300,000 and joint filers earning $500,000 to $600,000; an 11.3 percent rate for single filers reporting $300,000 to $500,000 and joint filers with $600,000 to $1 million; and a 12.3 percent rate for single filers reporting over $500,000 and joint filers with more than $1 million income.

Those increases are happening regardless of the cliff.

But if the nation does take the plunge, on Jan. 1 federal taxes will go up on just about everyone, increasing total tax revenue by $500 billion, or 20 percent.

A household earning $20,000 to $30,000 would pay an extra $1,100, according to the Tax Policy Center. Those earning $75,000 to $100,000 would pay $3,700 more, while folks earning $500,000 to $1 million would pay an extra $39,000, according to the nonpartisan organization.

The increases would largely be the result of the expiration of tax breaks. The main one is the Bush-era tax cuts of 2001 and 2003, which if allowed to lapse would cause rates to revert to the levels under former President Bill Clinton.

For example, a married couple filing jointly with an income of $72,300 to $145,900 would see their rate increase from 25 percent to 28 percent. The top tax rate, for those making over $397,000, would increase from 35percent to 39.6 percent.

In addition, families with children under 17 would have their child credit cut from $1,000 to $500. The capital gains tax would increase from 15 percent to 20percent, a change primarily affecting higher income earners.

The temporary payroll tax cut, which in 2010 reduced contributions to Social Security from 6.2 to 4.2 percent, will also expire, reverting to the higher level.

Employers will begin taking out the higher payroll taxes right away, but income tax withholding is another story. Since employers don't know how much to withhold, the IRS is advising companies to continue withholding at 2012 levels for the time being.

But that means the amounts withheld from paychecks will initially be artificially low, and will need to increase later in the year to compensate, according to the American Payroll Association.

A series of tax cuts pushed by President Obama also are set to expire. These include expansion of the earned income tax credit for families with three or more children and the expansion of tax credits for college tuition.

The estate tax also would jump. Instead of covering estates of $5 million with a top tax rate of 35 percent, those of as little as $1 million could pay rates as high as 55 percent, according to the tax center.

Wall Street was down sharply Friday on fiscal cliff fears, but financial advisers were urging clients to ride it out.

“I don't think anybody should be running for the exits or running scared,” said Montgomery Taylor, a Santa Rosa wealth management planner. He said the stock market has largely built in the uncertainty of the fiscal cliff, and when a deal is struck, markets could rebound nicely.

“I do believe that in the final hours they will come to some resolution that they can agree upon and put us on track for recovery,” Taylor said.

If that doesn't happen, some worry about taxes being a drag on the economy. “I think we're going to see in a real-life laboratory the impact of some of the tax increases on the economy of the nation and the state,” said Jack Atkin, president of the Sonoma County Taxpayers Association.

But others say higher taxes are an inevitable reality if the nation is going to get serious about tackling its ballooning debt. Yet smaller government budgets will mean more labor cuts, which may hold back growth, said Robert Eyler, professor of economics at Sonoma State University.

Whatever happens, the fiscal cliff will “cast a long shadow” that will make late 2013 and 2014 feel “more like recession than recovery.”

“Some pain is coming, and needs to come,” Eyler said.

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