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The fiscal cliff: How it could affect troops

Dec. 31, 2012 - 03:29PM   |   Last Updated: Dec. 31, 2012 - 03:29PM  |  
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The so-called fiscal cliff is actually a series of four potentially long drops — and the first could have the biggest effect on the pocketbooks of military members and their families because it involves tax rates.

But everything involved in the budget imbroglio remains in flux as negotiations continue to try to avoid the fall that some fear could send the nation back into a recession.

President Obama said Monday that one of his top priorities is to stop the tax hike. "It appears an agreement to prevent this New Year's tax hike is within sight, but it is not done," he said.

An agreement might also be reached to delay across-the-board budget cuts.

"That is a piece of business that still has to be taken care of," Obama said.

The four key elements of the fiscal cliff situation are:

• The Jan. 1 expiration of the Bush-era tax cuts.

• Across-the-board cuts known as sequestration that officially take effect Jan. 2.

• The potential for the federal government to hit its current debt ceiling and run out of borrowing power sometime in early March.

• The expiration on March 27 of a six-month temporary spending bill that has kept the government running.

The part that sounds the worst — the 10.3 percent across-the-board cuts known as sequestration — might actually have the least direct impact on service members, because Obama decided last summer to exempt military personnel funds from cuts.

This means that troops' pay, benefits and jobs are not subject to cuts. Over time, however, they might feel an indirect impact from the cuts as civilian Defense Department employees are furloughed, money for supplies and equipment tightens and maintenance and upkeep on military bases is deferred.

High-level negotiations between Congress and the White House include the possibility of delaying sequestration by two months, providing more time to try to come up with another way to reduce federal spending. Those talks could lead to spending cuts that would hurt military families in other ways.

The negotiations also involve trying to avoid a variety of tax increases that would affect most taxpayers. Impact varies by income, family size, location and other factors, but the non-partisan Tax Foundation estimates the average tax increase will be $3,500 for a family of four.

Military families are cushioned from some of the tax hikes because military housing and food allowances are not taxable, and enlisted troops and most officers deployed in combat zones pay no federal income taxes. But they will still feel the effects of increases in income tax rates and in payroll taxes for Social Security, as well as a reduction in the child tax credit.

Dealing with the $16.3 trillion ceiling on how much the U.S. government can borrow is another point where spending cuts could be part of an agreement to either raise the debt ceiling or provide borrowing power to operate under the existing ceiling. This will be another opportunity for lawmakers to look for reductions in federal spending, with unresolved questions about whether defense spending and military personnel programs could be part of those cuts.

The fourth and final ledge of the fiscal cliff comes at the end of March, when Congress must approve spending bills to keep the government operating through the end of the fiscal year on Sept. 30. Reductions in defense spending could be discussed, with no guarantee that personnel programs would continue to be exempt.

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