Anxiety is already building on what promises to be a historic (for mostly all the wrong reasons) lame duck session of Congress after this year’s 2012 national elections in November. This session could possibly have a dramatic affect on the nonprofit arts sector.
Because all the seats in the U.S. House, and one-third of the Senate will be on the ballot November 6, there is very little motivation from either party to find a compromise in advance of election day. With control of the White House hanging in the balance, the political stability that follows an election appears to be the safest time for these issues of substance to be addressed, albeit in a very compressed timeframe.
What is the big deal?
It has many names: “Taxmageddon”; “Legislative Apocalypse” and others; you get the idea. The country is on schedule to see large tax cuts first put in place by President Bush, and then extended by President Obama, expire and huge cuts in government spending basically happen at the end of this year. This means that a tremendous shortfall for the national economy at large. Currently, the Congressional Budget Office estimates are that over $600 billion will be taken out of the still precarious economic recovery by the end of 2013.
How did we get here?
Last summer, President Obama agreed to House Republican demands to cut the burgeoning national deficit in order to increase the national debt limit ceiling to avoid default on our debt obligations. The Budget Control Act of 2011 (BCA) put into place a bipartisan “supercommittee.” Charged with finding how to cut $1.2 trillion promised in the BCA, they failed (miserably) to reach agreement which will trigger deep automatic cuts of 8.4 percent (sequestration) to most social and defense programs as agreed to in the BCA starting 2013.
Adding to the anxiety is the status of the so-called “Bush Tax Cuts” and the payroll tax cut which are set to expire at the end of this year. By letting the tax cuts lapse, the marginal rates for just about every American are scheduled to increase and employees will see less in their paychecks. Combined with the previously mentioned spending cuts, you get a dramatic shortfall. This will spur a lot of talk about reforming the tax code and cutting additional spending, and it could affect the arts sector in a number of ways.
Potential impact on the arts
Yikes! Yes, that is one reaction. Solving these immense problems within the two-month period of the lame duck session is where the real drama begins.
First, as lawmakers struggle to make up revenue that might be lost by extension or expiration of tax cuts, the focus has turned to parts of the tax code where savings or return to the Treasury might come from. Recently, the tax-writing House Ways and Means Committee held a hearing examining the operations of nonprofits. Specifically, the way 501(c)3s and (c)4s are fulfilling their compliance duties given their tax exempt status. It is no secret that this and a series of future hearings are designed to fact-find and prioritize those parts of tax code that may be part of a larger conversation about what could survive a year-end push to balance the impact of any scheduled tax changes.
The Charitable Deduction—a vital lifeline to the nonprofit arts sector—could be a target for elimination or reform in order to claim more revenue for deficit reduction or to maintain/expand certain tax cuts. While the deduction can count on wide bipartisan support, there is no guarantee given the daunting lame duck challenges for Congress any deduction is safe. The president has already proposed capping the value of the deduction in his last three budgets and during supercommittee consideration it surfaced that the deduction was possibly on the chopping block to make up revenue.
Employees of arts organizations, just like all employees, since 2011 have had their Social Security tax withholding rate reduced by 2 percent to 4.2 percent of their wages. The current reduction in these payroll taxes is scheduled to expire at the end of this year as well, so employees would see their paychecks reduced to their pre-2011 levels.
And it should not be forgotten how spending cuts may filter down to less federal spending for the cultural agencies like the National Endowment for the Arts (NEA) or Institute of Museum and Library Services. Congress will try to approve FY 2013 appropriations bills, but it is likely that some of those, including the Interior bill which funds the NEA and National Endowment for the Humanities may be postponed until next year.
In order to address these legislative issues, Americans for the Arts supports a set of principles outlined by Independent Sector that call for deficit reduction and tax reform that will not exacerbate income inequality or increase poverty. We have also been participating in a large national coalition of organizations that represent non-defense discretionary programs, such as cultural agencies, working to ensure that deficit reduction plans do not unfairly target these domestic programs.
Congress and the president will most trade contretemps without a lot substantively accomplished legislatively. Barring an unforeseen “kumbaya moment,” real policy considerations will not happen until after the election. There is a possibility that the current Congress will pass stop-gap measures that avert any crisis until the new session begins or a new president takes office. House Republicans are openly talking about a possible year-long extension of current policies to allow a more comprehensive tax reform effort. Whether or not the Senate, President Obama, or an incoming Romney Administration would go along with yet another stay of action remains to be seen.
We have also been participating in a large national coalition of organizations that represent non-defense discretionary programs, such as cultural agencies, working to ensure that deficit reduction plans do not unfairly target these domestic programs. National, state, and local organizations can join a letter to Congress here.
Americans for the Arts will be sending out E-Alerts as congressional action develops!
(Arts Watch is the twice monthly published cultural policy publication of Americans for the Arts, covering news in a variety of categories. Subscribe to Arts Watch or follow @artswatch on Twitter to receive up-to-the-minute news.)