Va. stands to get hit hard by fiscal cliff

The Winchester Star

WINCHESTER — The countdown to the dreaded “fiscal cliff” stands at 42 days.

Already, the threat of tax increases and federal government spending cuts is slowing the economy, and if no compromise is reached in the next six weeks, nearly everyone will pay the price.

A Dec. 31 deadline was established in the wake of political gridlock in August 2011 over raising the federal debt ceiling, resulting in the agreement to cut budgets and hike taxes beginning Jan. 2 if no alternative plan to reduce the deficit by $1.2 trillion was reached in the meantime.

The hope was that the consequences of inaction would lead to a long-term compromise, but no deal appears close.

Local residents are unhappy with the inaction.

Frederick County resident Jean Swartz, 43, isn’t worried about an increase in taxes, saying they’re necessary to pay for firefighters, police, roads and schools, but she’s angry with the seemingly constant congressional infighting.

“Congress’ inability to work together scares me more than going over any fiscal cliff,” she said.

Woodrow Whetsel, 48, isn’t sure how he would deal with an increase in his taxes.

“I can’t afford to pay any more taxes,” the Winchester resident said. “I’m hurting now.”

Looming is the end of the payroll tax cut, Bush tax cuts, tax credits benefiting families with children and ones that help pay for college and reduce the burden on the working poor.

Virginians on average would lose $4,451 more next year to the tax man — although individual totals vary widely based on income level, investments, deductions and other factors, according to a study from the Tax Foundation.

Anyone who pays federal income taxes, profits from investments or draws a paycheck will be affected by the $400 billion in tax increases, but some states would be hit harder by the $100 billion in cuts to the military and federal agencies.

Virginia fared better than most of the rest of the country in the aftermath of the 2007-08 financial crisis, but it will be more difficult for the state to escape the wreckage at the bottom of the fiscal cliff — which the Congressional Budget Office predicts would plunge the country back into a recession.

According to a study by Richmond-based Chmura Economics and Analysis and George Mason University Center for Regional Analysis, Virginia would be the second hardest hit state in the country.

Unemployment would quickly rise due to a decline in federal procurement and federal payroll spending, and from there would ripple out — affecting suppliers and vendors associated with prime contractors. Other businesses would also be hit by a drop in spending from federal employees, contractors, suppliers and vendors.

In the end, 207,571 jobs would be lost in Virginia, according to the study.

The unpredictability is already freezing businesses like Executive Protections Systems (EPS), a Kernstown-based security company that has government contracts.

“We’re being very frugal,” said Mike Guevremont, EPS vice president of operation. “We may have hired more staff recently, but we’re waiting to see where everything lands.”

EPS isn’t the only business being hindered by the threat of the cliff.

An October survey by the National Federation of Independent Business showed a record 23 percent of small-business owners said they had no idea what conditions would be like in six months.

And a September survey of small-business owners and manufacturers by the National Association of Manufacturers and the National Federation of Independent Business showed that 67 percent of respondents weren’t willing to expand or hire new workers because there was too much uncertainty in the economy — potentially wiping out 1 million jobs this year alone.

President Barack Obama and congressional Republicans are trying to work out a compromise that would include a combination of budget cuts, slowing long-term spending growth and increased revenue.

Guevremont hopes the two sides can come together and find a happy medium.

“No government spending is just as catastrophic as over spending,” he said.

The Associated Press contributed to this report.

— Contact Conor Gallagher at cgallagher@winchesterstar.com