Cost of the cliff: $3,500 average tax hike, study says

The fiscal cliff is coming – and a report out this week says it could cost the average household $3,500.

That was the finding by the Tax Policy Center, a nonpartisan group whose study offered some of the most specific potential consequences of a big issue that has often been debated in abstract terms.

To get specific: tax breaks that expire at year’s end are set to raise overall taxes by $536 billion – 21 percent -- and cost middle income families an additional $2,000 on average, the nonpartisan Center found. Nearly 90 percent of Americans would be see taxes rise by some amount “if we topple off the cliff,” the Center wrote.

The biggest increases would come from the end of the Bush tax cuts of 2001 and 2003 and the payroll tax cut approved in 2010, and are part of the fiscal cliff that will dominate discussions after the Nov. 6 election.

The cliff is D.C. shorthand for the combination of tax increases and automatic spending cuts set to hit by the end of the year unless Congress and the White House can forge a compromise to avoid it. I recently wrote about the automatic cuts, which would hammer defense spending and domestic programs alike. The Tax Policy Center report adds detail to the tax end of the equation, calculating what would happen if all of the tax cuts in question are allowed to expire (a result everyone says they want to avoid).

Among the poorest 20 percent, taxes would rise by $412 on average. The richest 20 percent would get hit for $14,173. The top 1 percent could pay more than $120,000 in added taxes.

Those are some big numbers. But just about every elected official wants to avert the worst of the spending cuts and any tax hike that’s going to cost the average family more than three grand. Odds are the impending damage prompts a last-minute deal after the election that at the very least punts the issue to next year. The New York Times reported this week that Senators from both parties are already working on a deal to raise money by changing the tax code (read: closing loopholes and deductions) and cutting some spending, but likely in a more targeted way than the “sequestration” set to take effect.

So, if you’re looking for reasons to hope, most people here think Congress will just barely avoid the full force of the cliff. (Picture the movie scene where the main character’s car goes hurtling into a canyon, only for the hero to leap clear, grab a branch and scramble to safety; now, just for fun, picture Harry Reid and Mitch McConell trying it).

But it also seems likely that at least some taxes will rise, and the details could have significant impacts on family budgets.

The 2010 payroll tax cut, for example, seems almost certain to expire, the Times reported. Neither presidential candidate has talked about further extending it, according to the Tax Policy Center.

If it goes away, the resulting tax hike would hit 77 percent of all taxpayers, with the dollar cost ranging from an average of $120 at the bottom end of the economic scale (the bottom 20 percent) to $1,950 in the top 20 percent. The middle quintile would pay $672 more, according to the center.

More controversial are the Bush tax cuts. Both parties want to keep them for most Americans, but there is debate about whether upper income families should pay more. Republicans generally say tax rates should stay the same across the board – no increases.

Democrats, including President Obama, want to see rates rise on some, but they differ on what the threshold will be. Obama has talked about increasing taxes on families with incomes of $250,000 and up. Other Democrats from wealthy cities say the cut off should be higher, because $250k doesn’t go as far there. (Shelley Adler, a Cherry Hill Democrat running for Congress, says the tax hikes should only hit those making $1 million and up).

This debate has the potential for the biggest tax impact on most Americans. While the end of the Bush cuts would only cost the bottom 20 percent an extra $53 a year, the second quintile would pay $558 more; taxes would rise by $888, $1,453 and $3,841 for the third, fourth and fifth quintiles of taxpayers. In all, 71 percent of taxpayers would pay more if the Bush cuts expire entirely, according to the Tax Policy Center.

Again, that seems very unlikely to happen. But to avoid it, Congress and the White House will have to work out a deal, which usually seems pretty unlikely itself.