Hours after the Presidential election came to a close, President Barack Obama and Speaker of the House John Boehner opened negotiations over what is commonly known as the “fiscal cliff”.  On December 31st, the Bush-era tax cuts will expire and spending cuts will begin.  In just six weeks the Republican-held House and Democratic Senate (with President Obama setting much of the agenda for the Democrats in both chambers) must find some common ground or risk another recession.

The mere prospect of a double-dip recession has weakened confidence in the private sector, leading many business to downsize or keep unfilled positions open until the situation is resolved.  Given the widespread implications of going over the fiscal cliff, the authors on LXBN have been peering over the legislation for months as the White House was on a haitus of sorts, trying to ensure a victory over Governor Romney.

To see the cliff-notes version of what will happen if Congress is unable to come to agreeable terms, check out Deirdre Wheatley-Liss’s post where she provides an easily-digestible bulleted list of many of the tax rates and budget cuts that will kick in post-fiscal cliff.  For a more in-depth look at what the fiscal cliff holds and why we’re here, Kevin LaCroix has one of the best posts on LXBN covering this topic, where he had this to say on The D&O Diary:

“The phrase the “fiscal cliff” refers to a likely budget crisis and to a corresponding projected slowdown in the economy if specific laws are allowed to expire or to go into effect at the beginning of 2013. The changes include tax increases that will go into effect due to the expiration of the Tax Relief, Unemployment Reauthorization and Job Creation Act of 2010, which had among other things extended the Bush-era tax cuts. The expiration of the tax cuts would result in an increase in all income tax rates, as well as the rates on estate and capital gains taxes. In addition, the alternative minimum tax will revert to 2000 tax year levels; federal unemployment benefits will expire; and the 2% federal payroll tax reduction will terminate.

The changes also include the automatic spending cuts (“sequestrations”) mandated by the Budget Control Act of 2011, because the Congressional budget “supercommittee” created by the legislation failed to agree on a deficit reduction plan. Annual cuts of $109 billion per year will go into effect, with over half of the cuts coming from defense spending.”

The Budget Control Act of 2011 had hoped to provide some impetus for Congress to come to a long-lasting agreement by requiring across the board cuts (sequestrations) if Congress was unable to craft a deficit reduction plan before 2013.  As these cuts would have to be equal to $1.2 trillion over the next 10 years, the Office of Management and Budget put together a report detailing the necessary amounts for Congress, where the $109 billion annual cut originated.

Christopher L. Rissetto and Robert Helland provided some analysis on the OMB’s report over on Reed Smith‘s Global Regulatory Enforcement Blog:

“OMB has calculated that to reach the $1.2 trillion in cuts to defense and non-defense spending required over the next 10 years, the federal budget must be reduced by an annual amount of $109 billion (factoring in interest savings generated by the cuts). This translates into a cut of 9.4% in defense spending levels and 8.2% in non-defense spending levels that would take effect on January 2nd.”

As Rissetto and Helland reported, drastic decreases in government spending would have a widespread impact on the national economy, potentially sending the U.S. into another recession:

“The Congressional Budget Office (“CBO”) forecasts the United States economy will fall back into a recession, “with real [Gross Domestic Product] declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013” (found atwww.cbo.gov).”

To better understand how these cuts would impact government agencies, take a look at Trey Hanbury and A.J. Burton‘s analysis of how the FCC will handle sequestration:

“The FCC will no doubt make the least painful spending reduction first: namely less travel, less reproduction, and fewer supplies. But even in the unlikely event that the FCC suspended all travel ($2.5M), ended all printing and reproduction ($1M), stopped purchasing supplies and materials ($1.7M), delayed all purchases of federal goods and services ($2.5M), and chose not to purchase any new equipment ($2.5M), the agency would only manage to eliminate $10.2 million from its budget. These implausible cuts would still require the FCC to identify an additional $17 million to eliminate during the 2013 fiscal year.”

Unfortunately for the bulk of Americans who will ultimately face the brunt of the pain if we go over the fiscal cliff, both parties have seemed unable and unwilling at times to come to a bipartisan agreement.  Many insiders believe that these troubles indicate a lack of support for the kind of “grand bargain” imagined by the White House.  This could lead to Congress punting the issue, similar to what happened in 2011 when talks between President Obama and Speaker Boehner fell apart.

This has led to some predicting (and even advocating) that the Democrats will hold out for a broad, sweeping legislative fix, intentionally pushing us over the fiscal cliff and forcing the GOP’s hand.  As Stephen Kantor on the Wealth Law Blog said in his post, some players on Capitol Hill are viewing this as “an increasingly attractive option”:

“For some politicians stepping off the “fiscal cliff” is looking like an increasingly attractive option. It would allow both parties to avoid compromise, and the newly elected president could come to Congress with his new plan.

Members of Congress may be willing to allow the Bush tax cuts to die for another reason: it won’t force them to raise taxes. Voting to increase taxes is never popular in the polls, but if the Bush tax cuts are allowed to die, taxes will increase automatically, generating nearly $4 trillion in revenue. Congress could use some of that money to reduce the deficit, and could give the rest back to voters in the form of new tax reductions. That approach might look good to voters, but is it best for the economy? Unless Democrats and Republicans meet a consensus, the “fiscal cliff” might be inevitable.”

LaCroix echoed many of these feelings toward the end of his post:

“The reason the country is approaching the fiscal cliff in the first place  is because of the adversarial parties’ past failures to work together and the willingness on the part of some to engage in political brinksmanship. The forces that have produced past stalemates could take the country right off the cliff. All it takes for the country to go off the fiscal cliff is a little bit of political gridlock —  which happens to be the specialty of this particular Congress.”

With problems like these facing Congress, it’s probably a good sign that some high-ranking legislators are spending Thanksgiving in Washington D.C. to pound out a budget proposal that will please both parties.  From the sounds of it, everyone at the LexBlog Network wishes them luck.

To read more legal analysis covering the fiscal cliff, be sure to check out LXBN’s tagged page on the subject here.