Several developments in Washington could have a significant impact on the economy and, ultimately, on your wallet in 2014, whether you are a business owner, a homeowner in a high-risk flood area, or an online shopper.
And with another debt ceiling battle on the horizon, the Federal Reserve’s bond purchases winding down, and numerous Affordable Care Act (ACA) provisions taking effect, make sure to keep these things on your radar.
The debt ceiling: The Treasury Department expects the government to run out of money sometime in late February or early March, requiring an increase in the federal borrowing limit (surprise!). The ideological fissures that forced the debt ceiling stalemate in 2013 remain, which makes another standoff more likely. The temporary deal that ended that battle expires in early 2014. President Obama and congressional Democrats have said they will not negotiate on the debt ceiling. House Speaker John Boehner (R-Ohio) is unlikely to pass a clean debt increase without some offsetting spending cuts.
Why should you worry about the debt ceiling? Past brinkmanship to raise the debt ceiling led to the first downgrade of the U.S. credit rating in 2011. The impact extended to the broader economy, contributing to lower equity prices and increased corporate and household borrowing costs. It also lowered consumer and investor confidence, which led to businesses postponing hiring and investment and individuals delaying purchases. Another debt ceiling showdown in 2014 could have ripple effects throughout the economy, undermining the economic recovery.
Higher mortgage rates: The Fed announced in December that it will begin tapering its bond purchases in 2014. The Fed has been buying $85 billion a month of bonds to keep long-term borrowing rates low to stimulate spending and growth. The interest rate on long-term loans, such as mortgages, is likely to rise as the Fed slows bond purchases. Mortgage rates are still well below their historical average, but if the economy continues to improve, you should expect rates to rise steadily.
Based on the latest quarterly data, the U.S. economy appears to be picking up steam. Higher growth rates will increase demand for available credit and probably push mortgage rates higher. In addition, Fannie Mae and Freddie Mac, the housing-finance giants that dominate the mortgage market, are boosting the fees they charge to lenders. These higher fees will inevitably be passed along to borrowers.
So whether you are thinking of refinancing your mortgage or buying a home, be mindful that rates are on the upswing this year.
Expiring tax breaks: Congress let a package of 55 tax breaks expire at the end of last year. The full array includes tax breaks that allow companies to write off research and development costs, deduct half the cost of new equipment purchases right away, and get tax credits for hiring veterans.
For the last two years, employers could choose to cover (tax-free) up to $245 of your expenses per month for taking the bus or train. As of Dec. 31, employers can now cover only $130 per month tax-free. Gone also is the tax relief program for “underwater” homeowners who received a debt write-down from their banks. Anyone who gets relief on their mortgage will now have to pay taxes on that amount.
The end of these programs will raise the effective tax rates for many companies and individuals, unless Congress decides to extend them. Lawmakers have allowed these tax breaks to expire in the past, just to eventually renew them retroactively. Nevertheless, this process makes it more difficult to plan as it heightens the uncertainty that some tax breaks will not be renewed.
Obamacare fees: New taxes will pile up on insurance premiums and income tax bills for many Americans in 2014. These taxes took effect in 2013 so some people might start noticing them when they file their returns on or before April 15. The new taxes and fees under Obamacare include a 2 percent levy on every health policy, the New York Post reports. Under the ACA, individuals earning more than $200,000 and households earning more than $250,000 will pay an added 0.9 percent Medicare surtax in addition to the existing 1.45 percent Medicare payroll tax. If you are among those above these income thresholds, you will also pay an extra 3.8 percent Medicare tax on unearned income, such as rental income and investment dividends.
Higher insurance costs: Companies got a reprieve this year on the new healthcare law as the provision requiring large employers to provide coverage for workers or pay a penalty was delayed until 2015. But new rules set to take effect in 2014 will limit the costs to employees and waiting periods for coverage, and extend coverage to dependents until age 26. Some of Obamacare’s most unpopular provisions go into effect in 2014. A new health insurer tax will impose fees on health insurance companies, raising about $8 billion this year alone for premium subsidies and other provisions. The tax will more likely be passed on to consumers through premium increases.
So if you own a business that provides healthcare coverage to your employees or are an individual buying healthcare through one of the insurance marketplaces, you should not be surprised by the higher premiums due to these new provisions.
Unemployment benefits: About 1.3 million jobless workers lost unemployment benefits at the end of 2013 when Congress failed to extend the program as part of the budget deal reached in December. An additional 3.6 million workers will lose access to benefits over the next twelve months.
The Congressional Budget Office (CBO) said letting the benefits expire could cost as many as 200,000 jobs across the nation in 2014. Most of the effects will be felt in certain regions where unemployment is high and job opportunities are low. States with high long-term unemployment rates, such as Alabama, New Jersey, Nevada, and Rhode Island, will be the most affected. Mark Zandi, chief economist of Moody’s Analysts, said for every dollar the U.S. spends on unemployment insurance, $1.55 returns to the nation’s gross domestic product.
President Obama called in his year-end news conference for Congress to pass a three-month extension when it returned from the holiday break in January, but bills have failed to clear procedural votes. The CBO said the cost to extend the federal benefits by another year is about $25 billion, which has many congressional Republicans balking at the price tag. House Republicans have insisted that any renewal of the benefits be offset.
Millions of subsidized flood insurance policies will lapse: In 2012, Congress passed a law aimed at stabilizing the financially insolvent National Flood Insurance Program by allowing insurance premiums to increase gradually. Last fall, the owners of second homes, commercial properties or properties with multiple flood-related insurance claims began paying increases covering 25 percent of the gap between their subsidized rates and rates reflecting the true risks of building in flood zones. On Oct. 1, 2014, if you own coastal and riverside property in a flood-prone area, you will begin to face higher annual premium increases for the next five years until your premium matches the true risk of flooding.
Multiple bills that would delay the rate hikes have been proposed in both chambers. The bill gaining the most backing, sponsored by Rep. Maxine Waters (D-Calif.), would delay the higher rates for at least another two years. Lawmakers could have a vote on the bill as soon as January.
Internet sales tax: 2013 could have been the last year we had a Cyber Monday without a sales tax. The Supreme Court declined last fall to hear challenges to state laws governing Internet sales tax collection, setting the stage for Congress to take up the issue. The Senate passed the Marketplace Fairness Act, which would allow states to compel out-of-state online retailers to collect sales taxes, in May. The bill moved to the House and was assigned to the House Judiciary Committee under the chairmanship of Bob Goodlatte (R-Va.). In September, Goodlatte released a series of principles to guide legislation on the issue. State Republicans met with leading members of Congress in November to push the measure. Action at the federal level could end the days of tax-free online shopping for everyone in the U.S.
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