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Issue Brief #3558 on Taxes

April 4, 2012

Taxmageddon: Massive Tax Increase Coming in 2013

By

If President Obama and Congress fail to act this year, an enormous, unprecedented tax increase will fall on American taxpayers starting on January 1, 2013. The Washington Post called the looming tax increase “Taxmageddon,”[1] and Federal Reserve chairman Ben Bernanke called it a “massive fiscal cliff.”[2]

This impending tax increase is mostly the result of the expiration of many long-standing policies that all expire at the end of 2012. President Obama and Congress should start working together now to prevent this massive tax increase rather than waiting until the end of the year. That would assure families, businesses, and investors that their taxes will not rise sharply as the economy is still staggering to its feet and show the voters that Washington really can get important things done—even in an election year.

Taxmageddon Is Huge

Taxmageddon is a $494 billion tax increase that strikes at the beginning of 2013. Under current law, tax policies in seven different categories will expire, and five of the 18 new tax hikes from Obamacare will begin.

These tax hikes will raise $494 billion in 2013 but will remain in place unless President Obama and Congress stop them. Taxpayers would see even bigger tax hikes in succeeding years as the tax increases raise more revenue as the economy grows.

Although these tax increases will not start raising new revenue until next year, they are having a negative impact on the economy today. Families, businesses, and investors need to know how much tax they will pay in the future before making important economic decisions. The uncertainty caused by Taxmageddon means they are stuck in neutral while they wait for President Obama and Congress to act. This is slowing job creation and stopping many of the millions of unemployed Americans from going back to work.

A tax increase the size of Taxmageddon for just one year is simply unprecedented. Usually tax and budget policies are evaluated on estimates over 10 years. A 10-year tax increase of Taxmageddon’s magnitude would be off the charts. By comparison, all the tax increases in Obamacare—itself an enormous tax increase—raise $502 billion over 10 years, which is almost as much as Taxmageddon will increase taxes just in 2013.

Taxmageddon’s Sources

Almost 34 percent of the tax increase from Taxmageddon comes from the expiration of the 2001 and 2003 Bush tax cuts. These cuts are best known for reducing marginal income tax rates, but they also reduced the marriage penalty, increased the Child Tax Credit and the adoption credit, and increased tax breaks for education costs and dependent care costs.

Tax relief

Another 25 percent of Taxmageddon comes from the expiration of the once-temporary payroll tax cut. The expiration of the patch on the Alternative Minimum Tax (AMT)—which would raise the income threshold over which families qualify for the AMT to prevent middle-income families from paying this tax that is only supposed to impact “the rich”—accounts for 24 percent of the total potential 2013 tax increase.

The remaining tax increases come in part from Obamacare, notably the start of the Hospital Insurance 3.8 percent surtax on wages and salaries over $250,000 and investment income over that amount. This is the most economically damaging tax in the law and the one that raises the most revenue.

Then there is the expiration of the tax cuts contained in the 2009 stimulus and the expiration of the “tax extenders,” a group of about 50 tax policies that are regularly renewed for a year or two. The current policy on the death tax also expires in 2013. That means the rate will rise from 35 percent today to 55 percent and the exemption will fall from $5 million to $3.5 million.[3] The expiration of full expensing of new business capital investments (deducting the full cost at the time of purchase) rounds out Taxmageddon.

Table 1 lists the revenue each category of tax hikes would raise just in 2013. The appendix lists each separate tax policy that falls under each category that expires or begins in 2013.

Act Soon

Congress and President Obama have developed a penchant for waiting until the very last minute to act on pressing tax legislation. In 2010, they waited until late December to extend the expiring Bush tax cuts for two years. At the end of 2011, they waited again until late December to extend the expiring payroll tax holiday. They should break themselves of this bad habit.

Instead, Obama and Congress should remove the uncertainty clouding jobs and family finances by removing the threat of Taxmageddon now. Businesses, families, and investors need to know as soon as possible that this massive tax increase will not hit them as they awaken on New Year’s Day 2013.

Curtis S. Dubay is a Senior Analyst in Tax Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

Appendix: Breakdown of Taxmageddon

Show references in this report

[1]Lori Montgomery, “‘Taxmageddon’ Looms at End of Payroll Tax Holiday,” The Washington Post, February 18, 2012, at http://www.washingtonpost.com/business/economy/end-of-payroll-tax-holiday-sets-up-harder-hit-for-taxpayers/2012/02/16/gIQAnxqTMR_story.html (accessed March 14, 2012).

[2]Peter Schroeder, “Bernanke Warns Lawmakers Country Headed for ‘Massive Fiscal Cliff,’” The Hill, February 29, 2012, at http://thehill.com/blogs/on-the-money/801-economy/213351-fed-boss-warns-of-massive-fiscal-cliff (accessed March 14, 2012).

[3]A repeal of the death tax starting in 2010 was part of the 2001 Bush tax cuts. The law that extended all the other Bush tax cuts for 2011 and 2012 undid the repeal of the death tax and set it at its current 35 percent rate with a $5 million exemption. Because the death tax policy was changed from the original Bush tax cuts, it is treated separately.

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