Hendricks County Flyer, Avon, IN

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Westside

December 18, 2012

Fiscal cliff could have swift, negative impact on Indiana

A Ball State University economist expects the U.S. economy to be in deep recession by summer, if the mandatory tax increases and spending cuts associated with 2011's federal Budget Control Act take effect as scheduled on Jan. 1.

But while those measures may be financially painful for residents, Michael Hicks, Ph.D., says they're also necessary.

"We have to face the $15-and-a-half trillion (federal) budget deficit at some point," he said during a recent phone interview.

The two major revenue changes from the Budget Control Act are the elimination of the Bush tax cuts and the expiration of a 2 percent payroll tax cut for those making less than $110,300 annually. Child deductions are also scheduled to be discontinued.

Because of that, the Tax Foundation estimates Indiana will see a federal tax increase of 5.27 percent - about $3,653 per household. Along with that, state employment is expected to be 1.2 percent lower.

"I think (the effects) of the fiscal cliff, in the short run, will be far sharper," Hicks said, comparing it to other significant legislation in recent memory. "In the long run, the Affordable Care Act may be (more), but in the short it's the fiscal cliff, simply because it's a very large tax increase on households."

There are three ways of dealing with the trillions in debt currently held by the federal government: cut spending, raise taxes, or experience inflation.

"I think we're going to experience all three," Hicks said. "We're going to see a significant tax increase, big spending cuts, and I hope less inflation. That (last one is) an uncontrollable event."

Finding common ground on controlling future government spending would enable tax increases to be unfurled more slowly.

"Unfortunately, that requires a great deal of consensus," Hicks said. "I don't believe we're anywhere near that."

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