The sequestration cuts could hit defense spending and research and development hard. Both are big industries in Massachusetts. Sequestration could cost this state 50,000 jobs.
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Pickup trucks are offered for sale at Sarat Ford in Agawam earlier this year. The deal in Congress that stopped the country from going over the so-called fiscal cliff removed one layer of uncertainty for small business owners who now have a sense of what their income taxes will be in 2013, but big issues still remain for them to worry about.
Sarat Ford in Agawam is always selling pickup trucks, and December is usually an especially busy month with business owners eager to claim a tax advantage for the purchase of new equipment before the year is out.
But last month was a little slower than usual, said Jeffrey J. Sarat, general sales manager at the dealership. With the fiscal cliff negotiations putting those deductions in doubt, businesses held on to their money.
Kristina D. Houghton, a partner and head of the tax practice at the accounting firm Meyers Brothers Kalicka in Holyoke said even though the fiscal cliff settlement reached in Congress this week retroactively restored that tax break and others, it might have been too late.
Businesses have been depending on an ability to write off $500,000 worth of equipment purchases, like trucks, per business, she said. At the end of 2011, that expired and the write-off reverted back to $139,000 a business until Congress retroactively brought it back to $500,00 with this week's deal.
Most businesses expected that a fiscal cliff deal would retroactively put back the $500,000 write off. But few were willing to bet big until a deal was signed. Then the year was over and the opportunity lost, Houghton said. Any purchase now would be in the next tax cycle.
The same goes for business tax breaks on research and development, she said. It’s one wrinkle of the fiscal cliff deal, which will allow tax rates to rise for individuals with income over $400,000 and families earning more than $450,000 and continue those business tax deductions Houghton talked about.
What the deal did not do was continue a 2 percentage point cut in the Social Security withholding that will cut into nearly everyone’s paycheck. The rate will go to 6.2 percent from 4.2 percent.
Karl J. Petrick, associate professor of economics at Western New England University, said it works out to a $50 tax hit per weekly paycheck. Low-income workers who spend most of what they make would be hardest hit. Their cutbacks could reverberate through the economy. Instead of growing by 2 percent or 3 percent next year, the economy might grow by only 1 percent or 2 percent.
“It’s funny how just $50 per paycheck makes a big collective impact on economic activity,” he said.
Robert A. Nakosteen, a professor of economics and statistics at the University of Massachusetts at Amherst, said the fiscal cliff deal also didn’t address the “sequestration cuts” called for in federal law. It also didn’t address the federal debt limit in any real way. Both issues will have to be dealt with in the next few months.
“We seem to leap from one legislative crisis to another in this county,” he said. “It really is a shame.”
He said the sequestration cuts could hit defense spending and research and development hard. Both are big industries in Massachusetts. Sequestration could cost this state 50,000 jobs.
“That’s as many jobs as Massachusetts adds in a year,” he said. “There is no doubt in my mind that we are going to see a defense cut,” he said.
Nakosteen said Massachusetts also gets hurt when tax rates go up for high earners. The state has more high earners.
Michael Widmer, president of the Massachusetts Taxpayers Foundation, said more taxes on upper-income people are not likely to hurt the economy here.
“These individuals are not going to change their spending or investment decisions based on a small tax increase,” Widmer said.
Nakosteen said a renewal of extended unemployment benefits helps the state’s economy.
In November, the state Division of Unemployment Assistance notified 45,000 Massachusetts residents who were receiving federal extension benefits that their benefits will end Dec. 29. Those benefits were an additional 28 weeks of unemployment compensation approved by Congress as a way to help those struggling in the recession. The federal benefits were added to the 26 weeks of benefits provided by the state.
Political correspondent Shira Schoenberg contributed to this report.