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Fiscal cliff hits home: BSU professor says solving issue is imperative to economy’s future

By Molly Miron, Special to the Pioneer

BEMIDJI – A Bemidji State University assistant professor said the country’s pending “fiscal cliff” is highly relevant to Bemidji area residents, and some small business owners said the government must focus on spending, not tax revenues.

President Barack Obama and Congress, mainly Republicans, appear at odds how to end the fiscal cliff, a package of spending cuts and tax hikes if the sides can’t agree on an alternative to cut the nation’s deficit.

Currently, the tax cuts instituted during President George W. Bush’s term are set to expire, meaning everyone’s taxes would go up. Obama’s plan is to increase federal taxes on the top 2 percent of earners with incomes of $250,000 or more per year and extend the Bush tax cuts to the middle class and those with lower incomes. Gov. Mark Dayton has proposed an additional state tax increase on the richest 2 percent of earners on top of the president’s plan.

“As an economist, I think that’s a good idea,” said Michael Murray, a BSU assistant professor of economics. He predicted the economy could move back into recession if the two sides fail to settle the debate. And, he said, agreement to Obama’s plan is highly relevant to Bemidji area residents.

He cited figures from the Bureau of Labor statistics that reports Bemidji as having an unemployment rate of 6.4 percent and a median household income of $43,989, as compared to a statewide median household income of $58,476. The per capita income for Bemidji is $21,753, with $30,310 the statewide per capita income.

“When people’s taxes go up, disposable income goes down,” Murray said. “This means more money will be taken out of paychecks. Less take home pay means less disposable income and, in turn, less spending on consumables. This creates less demand for everyday products, which results in less income for businesses and, potentially, less employment.”

He said taxing wealthy people at a higher rate would not change their spending habits because they would buy what they want and need in any case. “A tax increase on the upper 2 percent would mean less money in the savings accounts for rich people. Saving is income that is not spent in the local economy in the first place.”

Beltrami County Administrator Kay Mack said county finances could be affected if the debate isn’t resolved. But services such as roads and bridges and health and human services that rely on federal funding would still be supplied out of reserves, as happened in the state government shutdown of 2011.

“We handle cash flows very well because of our healthy reserves and how we manage our investments,” she said.

Some local business owners expressed their frustration with the looming problems as well as other aspects of governmental policies.

“I’m more concerned with the long-term effect of the spending,” said Alan Merschman, owner of Kenny’s Clark & Goodyear Service with his brother, Brian. The family service station has been in business since 1959.

“If you make it detrimental to make more money, people are going to stop making more money,” Merschman said.

He acknowledged that letting the Bush tax cuts expire might increase the danger of recession, but said raising taxes on the wealthy without cutting government spending would be simply a short-term fix.

“It would be like giving an alcoholic a drink if he promises to stop drinking next week,” he said.

Merschman said he is also worried about the cost to small businesses of the Affordable Care Act and the likelihood of rich people leaving the state to avoid paying the additional increase Gov. Dayton supports. South Dakota Gov. Dennis Daugaard is already advertising for businesses to move to his state, he said. Besides, he said, Dayton doesn’t understand the necessity to produce goods or services or generate paychecks.

Cathy Francisco, owner of Cost Cutters Family Hair Care, said the idea that small businesses should be taxed as individuals is another aspect of the debate that concerns her.

“It scares me to death – all of it does,” she said. “The government is such a sore subject for me. I think they should all be fired. Everything they seem to come up with isn’t going to work.”

Francisco said she would agree to wealthy people and rich businesses such as oil companies paying more taxes, but not small business owners who “they always said are the backbone of this country.”

Paul Welle, vice president of First National Bank, a family business and 23 percent employee owned company, said he is also concerned that small businesses would be taxed as individuals. He said such a plan would inhibit business owners from investing in equipment and technology and creating more jobs for people who would be earning and spending.

“That’s where the growth happens,” Welle said. “These are the businesses you want reinvesting. The fact that they are taxed as individuals, that’s the rate that’s going to go up.”

Small business growth of 4 percent and cutting spending to match revenue would also remedy the deficit, Welle said.

Whatever the outcome of the debate, Murray said he is confident the two sides will come together before the deadline.

“They better not drag their feet too much, but I expect they will because it’s politics,” he said.