According to a report from the only living person who has done a federal sequestering of funds at the U.S. Office of Management and Budget (last done in 1980), President Barack Obama and House Speaker John Boehner shook hands on $800 billion of new revenue and an equal amount of spending cuts last summer.  After collecting 50.73% of the popular vote in November (the exact percentage that was garnered by President Bush in 2004) the president’s latest reported offer had doubled the revenue demands in exchange for half of the spending cuts.  And he also wants a few other things, like the ability to raise the debt limit without having to ask anybody reporting to the tea party.

The so-called “fiscal cliff” has virtually appeared from out of nowhere to become front-page interest in the popular media, and the latest Rasmussen and Pew Research Center/Washington Post polls released this week suggest that more Americans will blame the GOP for failure to reach agreement this year than the president.Most people see this as a fight about whether or not to tax wealthy people their “fair share.” In case you are wondering, the law we have today has the top 1% of taxpayers paying 38.7% and the top fifth of American taxpayers paying 94.1% of the federal income tax.

People seem to know that large spending cuts combined with large tax increases will hit the economy at the same time. Most everybody understands that income tax rates, payroll taxes, estate taxes and the tax rates paid on investments will all increase. Even if they don’t understand this, they see daily television news stories on people with assets scurrying to sell appreciated stocks and loading up on advice from the tax and estate professionals.

More to the point, they remember that the last row in Washington about raising the debt ceiling got ugly.  That’s also part of the cliff negotiations. They probably didn’t notice that the credit rating of the United States was lowered by the agencies looking at our balance sheets.  If they recorded that, most won’t understand that all of us will make higher interest payments through our taxes because of it.

There is, however, a lot more impact from this partisan standoff than is being popularly reported. Since 1989, the federal Worker Adjustment and Retraining Notification (WARN) Act mandates that companies notify employees a certain number of days before they are furloughed.  It will kick in any day now and the Lockheed Martin Corp., for one, is poised to send around 100,000 notices out to workers that their jobs will be affected and possibly casualties of the budget impasse and the first round of cuts to military spending.  This will undoubtedly get some press, and it won’t nourish consumer confidence.

Also not widely known to the public is that the Alternative Minimum Tax will apply to 31 million people instead of 4 million in 2013, if not fixed in a budget deal.  Without the usual patch to keep this tax provision focused on high earners, 45% of American taxpayers with incomes between $75,000 and $100,000 will now be subject to the AMT.  This will not be included with the increase in withholding by employers due to the expiration of the payroll tax holiday, because it varies based on deductions.

What else is part of the fiscal cliff?  The extensions of unemployment insurance easily agreed to earlier by both sides of the aisle will also expire.  Without a budget deal the federal welfare program that replaced Aid to Families with Dependent Children in the Clinton era – Temporary Assistance for Needy Families – expires shortly into the New Year.  Also the promised “doc fix” to override a law that would institute a 27% cut in fees for the physicians who are still taking Medicare patients should be a significant part of the negotiation, if it gets serious.  Tax credits for research and development expire on New Year’s Day unless forestalled by a December agreement.

I have just concluded several days of state legislative conferences at two meetings of national associations of elected state officials.  They can’t print money.  In half the states, term limits define the length of their service as lawmakers. The states mostly pay attention to their actuaries, bond counsel and consultants and they don’t do many studies that get immediately orphaned and shelved.  They take tough votes, and they always, in the end, pass an annual or a biennial budget.

They share their success stories and model laws at these conferences regarding the right things to do and their duties to taxpayers.  Some states win awards for innovations, and they are quickly copied by other states. States have been showing us how to reform pensions, raise and lower taxes, audit for fraud, consolidate agencies, eliminate boards and commissions and how to restructure Medicaid.  They are saving money on corrections by studying the effects of best practices on probation and parole programs.

The “laboratories of democracy” are well and functioning.  Sure, they make unwarranted assumptions and put off doing some things that they should. But in the main, we can look to the states for solutions to intractable public policy challenges, and we should support them when they have to make the hard choices that are demanded by a 21st century economy.

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