City government should brace for coming fiscal cliff

Celebrations of the outcome of Tuesday’s elections didn’t last too long before discussions of fiscal matters quickly rose to the fore. Financially, a superstorm is looming. And it was bound to affect each and every American regardless of whom we elected as president.

We are talking about the so-called fiscal cliff that our nation is approaching. The combination of spending cuts and tax increases scheduled to occur in the next few months looks ominously similar to the circumstances that Keynesian economists believe led to the second economic downturn during the Great Depression.

First off, the Bush administration tax cuts will expire in January. There has been talk of extending them for the middle-class while letting them expire for people who make more than $250,000 per year. That fight will soon be played out in the U.S. Congress. And while Democrats are right that some extra revenues are needed, Republicans are correct when they predict that any such tax increase will depress consumer spending just as the economy is starting to pick up steam.

Meanwhile, a variety of federal spending cuts are also scheduled to go into place.

A report from the nonpartisan Congressional Budget Office predicts that this combination of tax increases and spending cuts could cause the nation to slip back into a recession. Given the lessons of 1937 and 1938, it is hard to argue otherwise.

Here in San Francisco, we may have the impression that we are protected from this fiscal storm. The City just approved a new business tax structure aimed at attracting and retaining companies, and the state just passed Proposition 30, which prevents $6 billion in threatened cuts to education and other services. But federal spending cuts have a trickle-down effect. When the feds cut money, the state and local governments have to backfill the cuts or learn to live with less. And if the local tax base erodes due to a recession, it could mean more cuts locally.

As awareness of the fiscal cliff comes to dominate Washington in the coming months, Republicans will be averse to raising taxes and Democrats will fight spending cuts. President Barack Obama said has invited leaders of both parties, along with business, labor and community leaders, to help him start hammering out the details of a possible solution. Obama said he is not wedded to his entire budget plan, but that a deal has to include keeping taxes down on those who make less than $250,000 per year. The president said that he is “not going to ask students, seniors, and middle-class to pay down the deficit while those making more than $250,000 do not pay a dime more in taxes.”

Lawmakers representing the Bay Area should get behind the president’s call to extend the tax cuts for those people in the middle or lower income brackets, although $250,000 may draw the line too high. Likewise, they should let taxes rise for those Americans most able to bear the burden. And then, as a part of a larger budget deficit reduction plan, they should consider an approach similar to the one contained in the package that Gov. Jerry Brown put together for California. That budget cut spending and increased taxes while supporting vital programs.

In the meantime, San Francisco lawmakers should start preparing for the inevitable belt-tightening. Governments at every level will have to be more efficient once the storm subsides.

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