It is hard to walk down the street without having to endure some news about the impending doom known as the Fiscal Cliff. The purpose of this post is not to rehash in excruciating detail what the Fiscal Cliff is but to offer a perspective on how it impacts the trucking and logistics industries.
The Fiscal Cliff In Brief
The heart of the fiscal cliff issue is the expiration of Bush-era tax cuts that were no extended in the Budget Control Act of 2011 and signed by President Obama. The purpose of that act was to stem the tide on the spiraling debt crisis and to ensure that the US Federal Government did not go into default. The budget act increased the debt ceiling but also offered budget cuts in excess of the increase in the debt ceiling. The act also called for a vote on a balanced budget amendment for the federal government, something that every state except Vermont currently has.
The Congressional Budget Office has estimated that full implementation of the act would likely result in a reduction in the federal deficit from around 9% of GDP to around 2% by 2015. Republicans in Congress are still fighting some of the provisions of the act, most significantly the expiration of tax cuts that were implemented in the Bush administration. Effectively, the expiration of the Bush-era cuts will cause an immediate surge in tax rates including an increase in the capital gains tax rate from 15% to 20%, a new Medicare tax of 3.8% and overall higher tax brackets for individuals.
One of the more serious implications of the act is the potential impact on taxation for trucking companies. Many of the nations trucking companies operate as LLC’s where tax liability passes through to the owner at their individual rate. The implication is that the tax rate of these companies will jump and that will need to be accounted for somewhere in these companies budgets. Watching an additional 8% or more vanish from your bottom line is at the heart of many concerns over the fiscal cliff.
Such a dramatic rise in taxes has a lot of people; trucking companies and others alike, concerned about how this tax would be absorbed and whether the resulting set of actions companies are likely to take to offset this would create other, unintended consequences. This is where the economists come into play and the picture gets very fuzzy. No one can say with certainty what the impact would be at the macro level. Certainly many businesses have weighed in on what they intend to do but there is not a consensus.
Some warn of devastating dire consequences that could trigger another recession while others view it as a speed-bump that we will pass over and the resulting reduction in deficits will have a booster effect on the economy overall. The stagnation that is Washington will likely have a dampening effect regardless of what happens at this point. There are reports that fleet orders are being held back to see how this plays out and even if a compromise were reached in Washington that minimized the concerns for trucking firms we have already slowed the economic machine and it will take some time to heat up again. Most economists are predicting a slow Q1-Q2 period even in the best case scenarios and potentially a longer cycle of depressed activity if no action is taken and the act implements on Jan 1, 2013. As the clock continues to move this scenario becomes all the more likely.
Waiting And Watching
What is your company planning on and what actions have you taken or intend to take as a result of the fiscal cliff? Are you playing a “wait and see” game or are you actively preparing for a particular scenario? Please share your thoughts on how you are preparing for the fiscal cliff.