Congress Clears Fiscal Cliff Deal

The House and Senate approved legislation on New Year’s Day that addresses some of the issues associated with the so-called “fiscal cliff.”  The measure – which was crafted by Vice President Joe Biden and Senate Minority Leader Mitch McConnell (R-KY) – was signed into law on January 3.

The Votes

While the Senate approved the measure in the early morning hours of New Year’s Day in overwhelming fashion (89-8), the fate of the bill in the House was unclear for much of the day.  House Speaker John Boehner (R-OH) was being pressured by his Caucus to amend the Senate bill with additional spending cuts; but when word came back that the Senate would not accept that, he decided to bring the bill to the floor before the “fiscal cliff” would go into effect.

In the end, the House approved the bill 257-167, with 85 House Republicans joining 172 House Democrats in voting for the measure; 151 GOP House members and 16 Democrats voted against it.  Boehner and former Vice Presidential candidate Rep. Paul Ryan (R-WI) voted for the bill, while House Majority Leader Eric Cantor (R-VA) and House Majority Whip Kevin McCarthy (R-CA) voted against it – a rare split vote among leadership.  Boehner did not publicly urge his Republican colleagues to vote for the bill, but Cantor issued a formal statement condemning the deal.

The Bill

The highlight of the measure is the permanent extension of approximately 82% of the income tax cuts enacted in 2001 and 2003 that were set to expire at the end of 2012.  Only couples earning over $450,000 annually ($400,000 for individuals) will see their income taxes rise.  The measure also sets the tax rate for capital gains and dividends at 20% for those earning $450,00 and above, while keeping it at 15% for everyone else.  And the estate tax will be set at 40% (with a $5 million exemption) for those at the $450,000 threshold, which will be indexed for inflation each year.  However, the reduction on employee Social Security payroll deductions from 6.2% to 4.2% that was promoted by the President for the last two years was allowed to lapse.

In addition, the bill:  provides a permanent “patch” for middle class taxpayers that would otherwise be subject to the Alternative Minimum Tax and indexing it for inflation, ending an annual saga to find resources to protect those taxpayers each year; delays for one year a sharp cut in Medicare reimbursement rates for doctors; extends the temporary 2% Medicare reimbursement relief for ambulance providers for one year; extends a pay-freeze for federal employees, including the Congress; extends unemployment insurance benefits for a year, and extends for five years the expansion of the Earned Income Tax Credit and Child Tax Credit included in the 2009 Recovery Act.

The bill also provides a nine-month extension of federal agriculture programs (Farm Bill) that will, among other things, prevent a sharp increase in milk prices.

Of particular interest to local governments, the legislation would delay the implementation of the $110 billion across-the-board cuts to federal programs in FY 2013 (sequester) for two months.  The White House had been pressing for a one-year delay but gave in to Republican demands on that item.

Finally, the bill would provide one-year extensions for a variety of popular tax breaks that are commonly known in Washington as “extenders.”  They include the alternative fuels tax credit, the railroad track maintenance tax credit, parity between employers-provided benefits for transit and parking ($240 per month), the Brownfields tax credit, the New Markets Tax Credit, Empowerment Zone tax credit, low income housing tax credit, and the deduction for state and local sales taxes in states without an income tax.

What’s Next

Passage of the tax bill yesterday does not necessarily solve the problems presented by the fiscal cliff.  Congress must still consider an increase in the federal debt limit in the next several weeks, and the budget sequester still hangs over the federal government.  Congressional Republicans were deeply disturbed that the plan approved yesterday did not include any spending reductions and are expected to use deep spending cuts as leverage in the debt limit negotiations.

In addition, while the bill approved yesterday does not include any changes to the tax-exempt status of municipal bonds, the subject is expected to be a target in the coming months as Congress considers tax reform.  Both the White House and House Republicans proposed scaling back deductions for municipal bonds in fiscal cliff negotiations over the past month, and local government organizations such as the National League of Cities and U.S. Conference of Mayors have made the issue a top priority.



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