New report finds the expiration of tax cuts would devastate San Diego economy.
August 23, 2012 1:11 p.m.
Erik Bruvold, President, National University System Institute for Policy Research
Carl Luna, Political Science Professor, Mesa College
Related Story: D.C. Budget Cuts Could Devastate San Diego Economy
CAVANAUGH: I'm Maureen Cavanaugh. It's Thursday, August 23rd. Our top story on Midday Edition, if politicians in Washington throw the nation off that fiscal cliff we've been hearing about, how hard will the landing be for San Diego? A new analysis on the impact for San Diego of across the board budget cuts and the end of the Bush tax cuts predicts an economic wallop for our region. My guests, Erik Bruvold is president of the national university system for policy research, the group that just put out that report.
BRUVOLD: Good to be here.
CAVANAUGH: Carl Luna is professor of political science at Mesa College. Welcome back.
LUNA: Nice to be here.
CAVANAUGH: The budget office said the end of the Bush tax cuts would throw the nation into a recession. Is that prediction reflected in your report on the impact on San Diego?
BRUVOLD: Absolutely. And San Diego actually probably will experience even a greater downturn than the rest of the nation. And that's for a couple reasons. One, it's pretty obvious, we've got a large military presence here. And military contractors specifically would be targeted by the budget cuts if they go into automatic mode. And the second thing is that household incomes in San Diego are higher than the rest of the nation, so the progressive income tax, and the expiration of the bush era tax cuts hits certain San Diego families more than they would the average taxpayer.
CAVANAUGH: So how much of a hit?
BRUVOLD: Well, there's going to be variance. We still don't know some of the stuff from the White House. But anywhere between 4.3 to $5.9 billion in economic downshifting if those go into play in 2013. And to give you a perspective, that's about what we grew last year. So essentially, the economy being stagnant again probably somewhere between 20 to 30,000 job losses, so a really significant hit to our region if we don't get resolution of this problem in Washington.
CAVANAUGH: Is that enough to throw us into a new recession or back into the old one?
BRUVOLD: Absolutely. Both ourselves and the congressional budget office would predict that we'd be looking at at least 2 quarters of negative growth, which is the definition of a recession. We think that that probably is more pronounced in San Diego, and we wouldn't see positive growth until the fourth quarter of 2013 or maybe 2014 if we go through this process.
CAVANAUGH: Let's talk about why this may happen. And much of it, I believe, goes back to the congressional compromise over raising the debt ceiling in 2011; is that right?
LUNA: Yes, they set up a time of Russian roulette. Only five of the chambers are loaded, where they agreed to extent the debt sealing. Then they had these draconian cut, the bush tax cuts.
CAVANAUGH: They had to come up with a compromised budget deal in order not for this across the board cut to take place. Is there a stalemate now on the budget deal?
LUNA: Absolutely, until after the November election. Nothing is going to be done until November, December, if even then.
CAVANAUGH: And when is this the 10% across the board cut supposed to take place?
LUNA: Have an extra glass of champagne on new year's eve. It won't matter, because you're going to have a big hangover come January 1st, no matter what.
CAVANAUGH: The other part of the fiscal cliff that we're talking about is the end of the Bush era tax cuts. What kind of impact would that have on San Diego?
BRUVOLD: We built a model, and we estimate that it would be anywhere between 2.8 and $3.5 billion. The tax cut reduced the income rate on all brackets in the country. We removed the so called marriage penalty that was in place. All those go away along with changes to the estate tax, come January 1st. And when the IRS will do, and that's why it's more important that we get it done before the ball drops, the IRS is going to have to start in December putting forward new withholding tables and ramping up to anticipate 2013, this restoration to the tax code where it was before the changes in law.
CAVANAUGH: The Obama administration supports extending the tax cuts for everyone except the wealthiest 2% of Americans. Did you do any calculations to figure out what the effect would be if only the tax cuts for the rich were ended and the middle class tax cuts were extended?
BRUVOLD: Yeah, that reduces the impact by about a billion dollars. So you're still looking at about a 1.8 to $2.5 billion increase. The U.S. income tax, not the other taxes that we go along with that, but the U.S. income tax is highly progressive. Upper income earners pay the bulk of those, and so an expiration of the tax cuts that were in place would be principally on the back of upper income earners.
CAVANAUGH: So in other words, I'm trying to run this through my noneconomic brain, and the idea is that that would syphon out that amount of money from the pool of money that's here in San Diego.
BRUVOLD: Easy way to look at it, in San Diego County, rather than if everything expires, taxes go up around $3 billion. If just the taxes go away or the tax cuts go away for upper income earners, we go up about $2 billion. So that's the difference that's in play.
CAVANAUGH: And there is another aspect of the so called sequestration budget cuts for San Diego. The 10% automatic across the board cuts that we're talking about. We've done reports here on KPBS that cuts to the defense budget would probably hurt defense contractors in San Diego more than the actual military installations in San Diego. Is that what you found as well?
BRUVOLD: Here's how we looked at that. We ran a couple of different scenarios that plays it out. Lots of these balls are still moving and people haven't made some of the decisions. But the president announced that he was going to keep military salaries, uniform personnel were going to be held harmless in that case. If that's the case, we're looking at about a $1.1 billion reduction. However, if they extend it a little more, if they reduce the number of servicemen, don't cut wages, then we'd be looking at about a $1.7 billion. Since again, the White House hasn't made the final call on this.
CAVANAUGH: Another point that you factor into, I think, in your report on what the fiscal cliff might do, aren't the payroll reduction cuts supposed to expire too at the end of this year that most working people have been enjoying for the last couple of years?
BRUVOLD:; is that right. Not only will I have one class of champagne, I guess I'll have two. Our analysis that pegged the cost of the fiscal cliff at 4.3 and $5.9 billion, that didn't even include the expiration of the 2% payroll tax cut that people have been injoying. Most people have said that's off the table, that's going to expire in Wahsington DC. We looked at the Bush tax cuts, the sequestration, and the alternative minimum tax. That needs to be fixed every year, and with the current environment, the pro forma vote that Congress takes on that is anything but certain this year.
CAVANAUGH: Carl, one of the reasons that the Congress decided to go forward on this, to reach a deal on the -- extending the debt ceiling and to do it this way was because the idea of across the board cuts was so awful that no one could comprehend that Congress couldn't come up with some sort of compromise that would find some way around these automatic cuts that are going to be triggered at the end of the year if there is no alternative budget. So what happened?
LUNA: Well, what happened was Congress thought it would become more intelligent down the pike and actually be rational and deal with this when it wasn't rational enough to deal with it in the first case. You don't hook up the debt ceiling to long-term discussions about deficit because you need to keep the debt ceiling to maintain current spending. Rationality flew out the window. In this heated partisan environment with Grover Norquist having pledges from Republicans, with nobody wanting Social Security Medicare cuts, there is no good solution. The hope is that people try to reach a solution in December and hope everybody forgets what they dead by the next primary.
CAVANAUGH: Are there one or two real sticking points? Or is the whole thing a complete no-go where it comes to compromise?
LUNA: There's an utter fixation with a big hunk of the Republican part in Washington, and nationally, on deficits. That's become the holy grail of what you have to deal with. And the theory is if you of I crisis, you you have force the Democrats to deal with it now. Of that being said, the American public is worrying about jobs more than deficits. This is a Washington-focused issue, but it can bring down the rest of the country.
CAVANAUGH: I'm wondering, the prevailing attitude, there have been a lot of very scary headlines coming out because of the congressional budget office report. But also if you read into the articles, it seems like the prevailing wisdom is that there is going to be some sort of compromise reached in Washington as you say. Maybe in December, maybe after the election. Is that your feeling?
LUNA: That would be my hope. I would eight 80/20 it's likely to happen. But given how charged things are, and the outcome of the election, you have a Republican house with a lot more tea party members, a closely controlled Senate. Barack Obama wins, they don't want to deal. Barack Obama loses with all the voter registration role purging, Democrats don't want to deal with Republicans. And both sides could end up putting a pox on all our houses.
CAVANAUGH: If there is a compromise, any chance it will come before the election?
BRUVOLD: Not at all. Neither side wants to have a compromise that could be spun by the other side being sort of an advantage.