For 23 hours, the nation was falling off the “fiscal cliff.” But, at about 11:00pm last night, Congress provided a ledge to stop the fall temporarily by approving a deal on tax cuts and automatic federal spending cuts worked out by the president and congressional leaders of both parties.
A little more than 400 days ago the Congressional Joint Select Committee on Deficit Reduction (Supercommittee) failed to reach agreement on a deficit reduction plan. This failure put the government on a path to $1.2 trillion in automatic cuts over 10 years that were set to begin today. This impending sequestration combined with the expiration of the so-called Bush tax cuts on December 31, 2012 have been described as the equivalent of falling off a “fiscal cliff” due to the devastating budgetary and economic effects that would be triggered if congress did not act.
Yesterday, Congress passed a bill implementing an agreement to raise about $600 billion in tax revenues and delay the implementation of sequestration. The Senate passed the bill late New Year’s Eve 89-8 as 40 Republicans joined 49 Democrats in voting for the agreement. Then, after debating the deal for most of New Year’s Day, the House followed suit by approving the bill by a 257-167 vote. In the House vote 85 Republicans joined with 172 Democrats to vote aye.
Revenues: The agreement makes permanent the Bush tax cuts for incomes below $400,000 for individuals and $450,000 for families. Taxes for earners above those amounts will increase. Taxes on capital gains will rise to 20 percent from the current 15 percent for incomes above the $400,000/$450,000 threshold. The estate tax (currently 35 percent) will increase to 40 percent for earners above $400,000/$450,000 for estates above $5 million. In the future the estate tax income thresholds will be indexed to inflation.
The bill reimposes limits to tax deductions and exemptions for some earners. Personal exemptions will be phased out at $250,000 and limits on itemized deductions will start at incomes of $300,000.
The agreement fixed the Alternative Minimum Tax (AMT) to keep millions of Americans from having to pay the AMT. The Earned Income Tax Credit, the child tax credit, and the college tuition tax credit are extended for five years under the bill. The bill extends for another year business tax credits for research and development and renewable energy, and the accelerated depreciation for investments in new property and equipment.
The payroll tax holiday, which for two years meant a reduction of 2 percentage points in the employee contribution to Social Security, was not extended in the agreement.
Spending: The bill extends unemployment benefits for long-term unemployed (longer than 26 weeks) for one year, but did not offset the $30 billion cost. A 27 percent decrease in Medicare payments to doctors (so-called “doc fix”) is extended for another year to be offset by unspecified spending cuts.
The agreement delays sequestration for two months, but does not stop $109 billion in across-the-board cuts for FY2013. The cost of the delay will be offset by spending cuts and new revenues from rule changes on converting Individual Retirement Accounts (IRA’s). As a result, in two months Congress and the president will have to negotiate on sequestration again at about the same time the Treasury Department says the debt ceiling (not addressed in the agreement) will be breached.
What now? We wait on the ledge for the new Congress and the president come up with a deal that completely averts the "fiscal cliff." If not, we start falling again.