CEOs Say Fiscal Cliff Work Is Incomplete

Execs urge politicians to move quickly on tax reform, deficit reduction.

Chief executive officers from DuPont Co. to Honeywell International Inc. urged U.S. politicians to move quickly on tax reform and debt reduction after the standoff over the fiscal cliff hurt the nation’s credibility.

Bipartisan cooperation over the $16.4 trillion debt ceiling, averting a further battle between Democrats and Republicans, would give markets confidence and spur economic recovery, Honeywell CEO David Cote said yesterday. Congress and the White House are at “a starting point” after putting a stop to tax increases for than 99 percent of households, said Ellen Kullman, DuPont’s CEO.

The Standard & Poor’s 500 Index rallied the most in a year yesterday after both houses of Congress this week approved a last-minute compromise to avert the so-called fiscal cliff of tax increases and government spending cuts. Even so, the deal was “a missed opportunity” to boost the economy and show U.S. leadership, Cote said.

“I urge our leaders to get back to the table as soon as possible, put politics aside, and work out a plan that will truly help to expand the U.S. economy over the long term,” Cote said in an e-mailed statement. “We cannot give up now, that’s not how a great nation acts. The components of a better, bigger deal are all there.”

Delaying automatic spending cuts, known as sequestration, for two months leaves national security and defense contractors still facing “dire consequences” if the cuts aren’t ultimately canceled, said Dan Beck, a spokesman for Chicago-based Boeing Co. The company makes both military and commercial aircraft. Half of the scheduled cuts would be in defense programs.

The bill Congress passed on taxes sent the Standard & Poor’s 500 Index up 2.5 percent yesterday in its biggest rally since Dec. 20, 2011. The agreement eliminated the threat of income tax increases for more than 99 percent of households. The surge in stocks also helps cement the standing of U.S. companies in the world economy. Led by Apple Inc. and Exxon Mobil Corp., American corporations make up 168 of the 500 biggest stocks globally with a combined market capitalization of $10.7 trillion, or almost 40 percent of the total.

President Barack Obama said Jan. 1 that he will sign into law a bill passed by the U.S. House undoing tax increases for most Americans. He also will seek higher taxes from corporations this year. Republicans are now turning to the need to raise the $16.4 trillion debt ceiling to force Obama to accept cuts in entitlement programs such as Medicare.

 

Debt Ceiling

“We’re in the same old fight with uncertainty still in the market,” said Brad Thompson, CEO of employee-owned Columbia Forest Products Inc. of Greensboro, North Carolina, the largest North American maker of decorative hardwood plywood. “I was hoping for long-term spending cuts, but it’s the same old malaise, with our leaders just kicking the can down the road.”

The U.S. hit the debt limit on Dec. 31 and the Treasury Department began employing so-called extraordinary measures to finance about $200 billion in deficits in 2013.

A debt limit increase will be needed as early as mid-February, according to the Congressional Budget Office, and the automatic spending cuts will start taking effect on March 1.

“A potentially bruising battle over the debt ceiling could further damage fragile consumer sentiment over the next two to three months,” John Heinbockel, an analyst at Guggenheim Securities in New York, wrote yesterday in a note.

Heinbockel, who recommends buying shares of Walgreen Co. and CVS Caremark Corp., said he expects drugstore chains and dollar store retailers such as Dollar General Corp. “to emerge somewhat unscathed” because they generate most of their sales from necessities rather than discretionary items.

“We remain cautious on the near-term income and spending outlook,” said Heinbockel, even with “considerable noise (and much optimism) over the ‘thirteenth hour’ resolution of the fiscal cliff.”

The bill to be signed by Obama would reinstate tax cuts that expired Dec. 31 on taxable income of as much as $400,000 for individuals and $450,000 for married couples, leaving those top earners with a marginal tax rate of 39.6 percent, up from 35 percent last year.

 

Payroll Tax

The largest economic impact of the budget accord will come from ending a 2-percentage-point payroll tax cut, which will shrink paychecks for U.S. workers immediately even as most income tax cuts that expired Dec. 31 are being extended permanently.

The payroll cut’s lapse will pull more than $100 billion out of the economy in 2013 and is the primary reason why 77.1 percent of U.S. households will face higher taxes this year, according to the nonpartisan Tax Policy Center in Washington. In addition, the bill extends expanded unemployment benefits and continues refundable tax credits for low-income families and college students.

The burden of higher income taxes will fall the most on the top 1 percent and particularly on the top 0.1 percent of taxpayers. Those making more than $2.7 million will pay an average of $443,910 more in 2013, or 26 percent of the additional burden, according to the Tax Policy Center. Households earning $500,000 to $1 million will pay an average of $14,812 more.

If Congress had not acted, taxes would have risen by more than $3,400 per household, automatic spending cuts would have started and expanded unemployment benefits would have lapsed. If there had been no resolution, the economy probably would slip into recession in the first half of 2013, according to the Congressional Budget Office.

“Getting something is better than getting nothing if we avert going over the cliff,” Matthew Shay, CEO of the National Retail Federation in Washington, said in a Dec. 29 telephone interview.

Even so, passage of a limited deal offers no guarantee that Congress will tackle broader fiscal reform later because gun control, immigration reform and other issues are going to draw attention from fiscal matters, Shay said.

“We should be more realistic about prospects for whether or not we’re going to get the so-called big deal, because once we get over the cliff and we get resolution to some of the basic elements, then obviously all of the pressure is off and you lose that opportunity to do the big deal,” he said. “It’s going to be much more difficult to get the big deal because people are going to lose their enthusiasm.”

 

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