It looks as if the fiscal cliff will be averted — maybe. Early New Year’s morning, the Senate passed a bill, in a bipartisan vote of 89-9, eliminating the tax hikes on most Americans while raising them on the rich. Automatic spending cuts that would have kicked in as the result of the sequestration have been postponed for two months. The deal was cobbled together by Vice President Joe Biden and Senate Minority Leader Mitch McConnell (R-KY). It now goes to the House where its chances of passage remain unclear. “Decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members–and the American people–have been able to review the legislation,” said Boehner and other GOP leaders in a written statement.
The agreement was reportedly put together at around 9PM New Year’s Eve, when two of the major sticking points were finally overcome. Republicans surrendered ground on the across-the-board spending cuts, delaying for two months the $109 billion in spending reductions aimed primarily at the Pentagon, as well as some domestic agencies. The White House gave ground on the estate tax, with the top rate pegged at 40 percent while exempting the first $5 million for individual estates, and $10 million for family estates. Thus estate taxes go up, but the exemption levels are increased.
With regard to taxes, the Bush tax cuts remain in place for individual Americans making less than $400,000 and couples making $450,000. Caps have been imposed on itemized deductions and personal exemptions will be phased out for individuals making $250,000 and couples earning $300,000. Taxes on both capital gains and dividend income would rise from 15 to 20 percent on income over $400,000 for individuals, and $450,000 for families.
The dreaded alternative minimum tax, originally enacted to ensure that wealthy Americans could not completely avoid owing taxes by way of loopholes, was one of the more sensible agreements emerging from the deal. It was finally indexed for inflation, exempting 30 million middle- and upper-middle-class Americans from owing an average of $3000 in additional taxes. In a victory for the president, the child tax credit, the earned income tax credit, and as much as a $2,500 tax credit for college tuition have been granted five year extensions. Several business tax credits, including accelerated depreciation for investments in business equipment and property, credits for research and development costs, and those for renewable energy sources have been extended for one year at a cost of $64 billion.
On the more dubious side, unemployment benefits will be extended for another year without any commensurate offset, meaning another $30 billion will be added to the deficit. Democrats point to figures released by the Congressional Budget Office (CBO), which estimated keeping the benefits would raise GDP by two-tenths of a percentage point in the fourth quarter of 2013. This has been touted as the equivalent of 300,000 jobs. Less touted is the cost of $100,000 for each of them.
The agreement also includes yet another suspension of the so-called “doc fix,” blocking a 27 percent reduction in Medicare payments to physicians for another year. The $25 billion cost of this suspension will ostensibly be offset by other, as yet unspecified, reductions in medical expenses. And finally, the deal reinstates the 6.2 percent Social Security payroll tax that had been cut to 4.2 percent two years ago.
Both Senate Republicans and the president gave the agreement a tentative thumbs up. “The president wanted tax increases, but thanks to this imperfect agreement, 99 percent of my constituents won’t be hit by those hikes,” said Senate Republican Leader Mitch McConnell. “There’s more work to do to reduce our deficits, and I’m willing to do it,” said President Obama in a statement. “But tonight’s agreement ensures that, going forward, we will continue to reduce the deficit through a combination of new spending cuts and new revenues from the wealthiest Americans.”
Yet the deal is far from the finish line. Although the House is scheduled to meet today at noon, Breitbart News is reporting that a conservative group, American Majority Action, claims that House Speaker John Boehner lacks the necessary support to get the deal through the Republican-controlled chamber. AMA spokesman Ron Meyer sent an email to reporters Monday, saying he’s “heard directly from senior GOP conservative members in the House that Speaker Boehner does not have a majority of support from the GOP caucus–not even close.”
Boehner himself has refused to endorse the deal, yet he has promised to offer a vote on it, or a GOP alternative, perhaps as early as 1PM. Undoubtedly, House Democrats will vote for it. House conservatives? “It’s three strikes in my book and I’ll be voting no on this bill,” Rep. Tim Huelskamp (R-KS) told CNN Tuesday morning. Huelskamp expressed his dismay regarding the effect the legislation will have on small businesses, as well as the one sticking point that undoubtedly resonates with his fellow conservatives: all the serious spending cuts have been deferred.
Yet even House conservatives may conclude the best course of action is to pass this bill, placating a majority of Americans for the moment, and get down to serious negotiations on spending cuts when the next major hurdle, namely the debt ceiling, is addressed. If truth be told, this agreement is nothing more than a dress rehearsal for those negotiations–during which the House, whence all spending bills originate, will have considerably more leverage than it has now. “The big battle is yet to come and it’s over the debt ceiling,” Sen. Johnny Isakson (R-GA) said in a Monday floor speech. “That’s the one where we have to find a way to make a deal. And the president is not going to make a deal by poking us in the eye.”
The rancor expressed by Isakson was illuminated by Washington Post columnist Charles Krauthammer, who referred to President Obama’s “incredible arrogance” during a pre-deal press conference on Monday. “I found it astonishing….He spikes the football on the Republicans. He rubs in the fact that they were resisting a raise in rates and he made them do it. And of course, as always, he places himself hovering benignly at an Olympian level above the fray, where the children are playing in the sandbox, and he is asking that everybody be reasonable, as if he just arrived in Washington on a tourist visa,” Krauthammer said Monday night on Fox News Channel’s “Special Report.”
In other words, even if the House spares Americans from the consequences of the fiscal cliff today, the nation is a long, long way from the finish line–with plenty of eye-poking from both sides expected along the way.
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