White House officials have yet to detail how they might handle the hundreds of billions of dollars in tax increases and spending cuts that are set to take effect if the administration and lawmakers fail to reach a deal on tackling the deficit.
But when faced with a similar situation before, the administration considered delaying scheduled tax increases by deferring changes to income tax withholding tables, according to people familiar with the matter. In 2010, when taxpayers were about to see a similar automatic increase in income taxes, top advisers to Treasury Secretary Timothy F. Geithner privately concluded that he probably had the power to put off changes to the tables under some circumstances, according to sources who spoke on the condition of anonymity to discuss the previously unreported deliberations.
If the administration were to take such emergency actions this time around, it could buy the White House and Congress more time to reach a deal, easing some of the urgency to preempt the fiscal cliff. Economists have warned that the combined effect of increased taxes and slashed spending could plunge the nation into recession.
Budget and tax experts, including people familiar with the administration’s thinking, say it could assert broad powers in the coming weeks to prevent the worst of the fiscal cliff, at least temporarily. If Mitt Romney is elected Tuesday, he could choose to continue or revise the emergency policies.
The scheduled tax hikes include increases in payroll taxes and rates for upper- and middle-income Americans, as well as an adjustment to the alternative minimum tax. These increases total about $500 billion next year and could deal a far larger blow to the struggling economic recovery than would the spending cuts, which come to about $100 billion over the same period.
Without any new actions by Congress, taxes will rise an average of $3,500 per household. Middle-class families would see an average increase of $2,000, according to the Tax Policy Center. Most people would see the impact of those tax increases in their first paycheck, because employers usually withhold a worker’s estimated taxes.
But the Treasury Department could try to blunt the impact by freezing withholding tables at 2012 levels. The law gives the Treasury secretary the authority to set withholding tables at his discretion, though they are supposed to comply with the law.
“This is a gray area,” said Gregory F. Jenner, a senior tax official in the George W. Bush administration. “I think it’s possible. Who’s going to challenge him?”