The Fiscal Cliff Vote: Implications for Arts Funding

On January 1 and 2, a series of tax and policy changes was set to occur that was so potentially devastating to the economy that Federal Reserve Chairman Ben Bernanke dubbed it the “fiscal cliff.” Following several weeks of tense negotiations, the House of Representatives voted on January 1 to pass legislation that averts tax implications associated with the fiscal cliff while delaying other components for a few months, thereby allowing Congress more time to develop a compromise.

The legislation—which was initiated by the Senate on New Year’s Eve, passed by the House on January 1 and signed into law the next day by President Obama—will permanently raise income tax rates to Clinton-era levels for families with income above $450,000 and for individuals who earn more than $400,000. For all Americans who earn below those thresholds, the 2012 tax rates were extended permanently.

While the news was hailed as a significant achievement for the 112th Congress, which expired on January 2 and has been considered one of the least effective in our nation’s history, we as arts advocates must be aware that several critical issues that could pose a risk to arts funding remain unsettled.

First, it is important to note that the legislation does not eliminate the across-the-board cuts in discretionary domestic spending (including to the National Endowment for the Arts [NEA]), known as sequestration, that are required under the Budget Control Act of 2011. Instead, the legislation simply delays implementation of the sequester until March 1, 2013. The decision to delay was made because, while members of both parties agree that federal spending must be reduced significantly, they felt that the sequester was not the appropriate means for creating such cuts. The two-month extension will grant Congress and the president more time to negotiate a new mechanism for deficit reduction. By delaying implementation of the sequester by two months, Congress once again is gearing up for a battle over federal spending and deficit reduction. This means we once again will have to be prepared to advocate aggressively for the NEA. The arts endowment could be particularly vulnerable if targeted cuts to selected discretionary spending lines come under consideration in these negotiations.

Second, two limits on tax exemptions and deductions for higher-income Americans will be reimposed: the personal exemption phaseout will be set at $250,000 and the itemized deduction limitation will kick in at $300,000. Both changes may affect charitable deductions for contributions that support cultural organizations and other charitable activities.

Finally, the 113th Congress, which was sworn into office on January 2, will face one of the most challenging budget environments in recent decades. Not only must it immediately begin to plot how it will address sequestration, but because the last Congress was unable to agree on a budget and instead passed only a short-term funding bill that expires in March, the new Congress must simultaneously negotiate another budget agreement for the second half of fiscal year 2013 (to avoid a budget shutdown) while preparing a budget for FY2014.

With so many moving parts, it is very likely that Congress will elect to pass another short-term spending bill (known as a continuing resolution) to complete FY2013 while it works on a new budget for FY2014. This continuing resolution could extend current funding levels for federal agencies through the end of this fiscal year, keeping the NEA at its current budget of $146 million. However, arts advocates cannot count on that best-case scenario. Across-the-board or targeted reductions to FY2013 funding may yet emerge as part of a deficit reduction agreement between now and March 1. The president and leaders of Congress from both sides of the aisle have made it clear that reducing federal spending is a priority, so we must prepare ourselves for another challenging year in Washington. As always, I encourage you to contact me with any questions, contacts or suggestions that you may have.