The fiscal cliff compromise passed by the Senate in the early morning
hours Tuesday would mute much but not all of the negative economic
impact of going over the cliff.
Most prominently, it would extend the Bush-era tax cuts for the vast
majority of Americans and spare tens of millions from the Alternative
Minimum Tax.
But the deal, crafted over the long weekend by Vice President Joe
Biden and Senate Minority Leader Mitch McConnell, still must be approved
by the House.
And while it would provide some short-term certainty, it would leave a range of big issues unaddressed.
For instance, when and how will lawmakers raise the country's debt
ceiling→ From all indications, the coming fight in February could be
ugly.
The legislation also creates a new cliff deadline over spending cuts
around the same time the debt ceiling will need to be raised.
And what about real tax and entitlement reform→ Both are key to
long-term deficit reduction, but neither are included in the compromise
proposal.
Instead, according to sources familiar with the deal and the text of the bill, the Biden-McConnell compromise would:
Make most Bush tax cuts permanent: The Bush-era
income tax rates would be permanently extended for all income up to
$400,000 ($450,000 if married). Bush tax cuts that apply to income above
those levels would expire.
Effectively that means for households above those thresholds, their top rate would rise to 39.6%, up from 35% in 2012.
Plus, the capital gains and dividend tax rates for these high-income
households would increase to 20% from 15%. For everyone else, investment
tax rates would remain at 15% or below.
The compromise bill would also preserve the expanded parameters for
the American Opportunity Tax Credit, the Child Tax Credit and Earned
Income Tax Credit for 5 more years.
Permanently protect the middle class from the AMT: The bill would permanently adjust the income exemption levels for the Alternative Minimum Tax for inflation.
Most immediately, the measure would prevent close to 30 million
middle-class taxpayers from having to pay the so-called wealth tax for
2012.
Without a patch for 2012 in place soon, the IRS has warned lawmakers
that up to 100 million taxpayers may not be able to file their 2012
taxes until late March and their refunds would be delayed.
Passing an AMT patch with an extension of the Bush tax cuts on most
income -- which together make up the biggest piece of the fiscal cliff
-- would boost real GDP by about 1.25% in fiscal year 2013, according to
earlier Congressional Budget Office estimates.
Cap itemized deductions on high-income households:
The Biden-McConnell compromise would cap how much those making $250,000
(married couples making $300,000) may take in itemized deductions.
Retain key tax incentives for businesses: The bill
would extend for two years several tax breaks for businesses, including a
production tax credit for developers of wind projects, the research and
development tax credit, and a measure allowing for bonus depreciation.
Retains several expired tax breaks for individuals:
The compromise bill would extend for one or two years a few "temporary"
tax breaks for individuals that regularly are extended. These include an
option to deduct state and local sales taxes in place of state and
local income taxes; and a deduction for elementary and secondary school
teachers for certain expenses.
Permanently extend a more lenient estate tax: The
legislation would preserve the current estate tax exemption level of
$5.12 million but index it to inflation for future years. And it would
raise the top rate to 40% from 35% currently.
If the deal is not approved, the estate tax bite would be much bigger
because the exemption level is scheduled to fall to $1 million and the
top rate would rise to 55%.
Extend benefits for the long-term unemployed: The bill would continue a federal extension of unemployment benefits for one year.
Without it, more than 2 million of the long-term unemployed would run
out of benefits at the end of this year, according to the National
Employment Law Project, an advocacy group.
Continuing the benefit extension for one year would cost an estimated $30 billion.
Prevent a cut in Medicare doctors' pay: The
Biden-McConnell compromise would prevent a scheduled 27% cut in
reimbursement for Medicare services for one year. The so-called "doc
fix" would boost the deficit by $31 billion.
Replace sequester for 2 months: The dreaded
sequester -- the automatic and blunt spending cuts to defense and
nondefense programs -- would be replaced for two months in 2013.
The two months of cuts would be replaced by $12 billion in new revenue and $12 billion in spending cuts.
It's not clear what Congress will decide to do about the sequester
after the two months are up. If left in place for the whole year, the
sequester would have reduced spending authority in 2013 by roughly $110
billion.
