End of payroll, Bush tax cuts top "fiscal cliff" fears: study

A woman walks past the U.S. Capitol in Washington September 25, 2012.

WASHINGTON (Reuters) - If Congress does nothing and the United States plunges off the "fiscal cliff" in three months, taxes would rise for 90 percent of Americans due to automatic increases in income and payroll taxes and other financial shocks, said a report issued on Monday.

In the latest forecast of trouble ahead if Capitol Hill cannot overcome its fiscal paralysis, the Tax Policy Center, a Washington think tank, predicted taxes would rise by $500 billion in 2013, or an average of almost $3,500 per household.

At the same time, government spending would shrink, reducing the budget deficit. But the economy would likely be thrown back into recession next year, the center said, echoing similar predictions of the devastating impact of going off the "cliff."

"Lawmakers could soften that near-term hit by delaying or repealing provisions in the 'cliff' or by enacting other spending and tax policies that would provide offsetting support for the economy," the center said.

Because Congress and the White House failed to reach a deal to cut the deficit by an additional $1.2 trillion over 10 years, the federal government is on track for draconian spending cuts in 2013 and beyond unless there is agreement on an alternative before the end of the year.

Lawmakers are expected to take up the matter following the November 6 presidential and congressional elections.

While there is broad speculation that Congress is likely to extend at least some of the income tax cuts beyond December 31, there appears to be little support for continuing the payroll tax cut, even among Democrats who previously championed it.

In September House of Representatives Democratic leader Nancy Pelosi told reporters, "I would hope that we would not extend it."

She added that this tax cut was intended to be in place for only one or two years to help stimulate the economy.

'RUN ITS COURSE'

Democratic and Republican aides in Congress have voiced concerns about short-changing the Social Security retirement fund, which is fueled by workers' payroll tax payments.

"Members on both sides are worried about financing Social Security over the long run and don't want to make this permanent," said a House Democratic aide. "The longer you do it, the harder it is to end" the tax.

A House Republican aide said: "It's run its course. There is no appetite in the House to do it" again. The sentiment appears to be similar in the Senate, according to aides there.

In May AARP, the influential advocacy group for the elderly, wrote Congress urging it to let the payroll tax cut die on December 31.

"If economic relief is still a necessity at the end of the year, AARP believes that it should be delivered through other avenues and no longer through the payroll tax system," said AARP head Barry Rand.

President Barack Obama and Congress this year approved an extension of a cut in the payroll tax rate to 4.2 percent from 6.2 percent. The tax is paid by about 160 million working Americans.

The lower rate gives workers an average of about $1,000 a year in additional cash. Obama says the added spending power helps the struggling economy.

Cuts in the individual income tax, capital gains tax, dividend tax and other taxes affecting most Americans were pushed through in 2001 and 2003 by President George W. Bush. They were extended under Obama in 2010, but will expire at the end of this year.

"No matter who wins in November, the country has to face the issue of looming tax increases," said Roberton Williams, a senior fellow at the Urban Institute, a partner with the Brookings Institution in the Tax Policy Center.

(Reporting by Patrick Temple-West, Kevin Drawbaugh and Richard Cowan; Editing by Jackie Frank)