As politicians focus on the upcoming elections in November, there is a looming fiscal cliff that the U.S. could fall off in December, Potomac Research Group Chief Political Strategist Gregory R. Valliere predicts.
The combination of just 20 legislative days after the election and multiple major issues to be resolved could make it the “most significant, most momentous lame duck session ever in Congress,” Valliere said. It could be as late as Dec. 22 before we know what taxes will be on Jan. 1.
“I think that the uncertainty of the Bush tax cuts is going to become an increasingly dark cloud for all of you, for you and your clients as we get into the fourth quarter of this year with no resolution,” Valliere told attendees at IMCA’s annual conference in National Harbor, Md., on Tuesday.
If nothing is done by Congress by January 1, the top rate tax will go from 35% to 39.6%; the capital gains rate will go from 15% to at least 20%; and the dividend tax would go from 15% to 39.6%. The estate tax exemption could go down from $5 million to the old $1 million exemption, Valliere said.
Other tax issues that remain uncertain is whether there will be extensions on the research and development tax credit and the bonus depreciation tax credit, or an update to the alternative minimum tax.
Those tax issues will come to a head as the debt ceiling debate from last summer will also come back in December.
“We have to go through this all over again, with renewed threats of default, with renewed fears of credit ratings agencies downgrading U.S. debt,” Valliere said.
How will the markets make decisions when no one knows what is going to happen, Valliere asked. The answer may be that that legislators take the path of least resistance and extend everything another quarter until March 31.
“I think it’s inconceivable that Congress would leave town without extending these rates at least temporarily,” Valliere said. “But it’s going to be a very high stakes game, and as you all know, the markets hate uncertainty and this is going to be the mother of uncertainty for investors as we head into the fourth quarter.”
All of those issues will follow a presidential election that Valliere predicts will be very close, in spite of recent gains in President Barack Obama’s approval rating. A new rolling five-day average of Obama’s approval rating has spiked to 50% in recent days.
But Mitt Romney could get the necessary 270 electoral votes to win, Valliere said, possibly including states like Ohio, North Carolina, Virginia and Wisconsin.
“We could be up until 3 am before we know for sure who the nominee is going to be on election night,” Valliere said. “This is going to be one of the closest elections in recent memory. I think it will be that tight. If you force me to guess, I would say Obama is probably still the slight favorite.”