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Bipartisan House Backs Tax Deal Vote as Next Fight Looms

By Richard Rubin, Roxana Tiron and James Rowley
January 02, 2013 1:55 PM EST 269 Comments
President Barack Obama arrives to deliver a statement at the White House on Jan. 1, 2013.
Photographer: Brendan Hoffman/Pool via Bloomberg
President Barack Obama arrives to deliver a statement at the White House on Jan. 1, 2013.

The fiscal bill passed by Congress solves an immediate dilemma, averting income-tax increases for most Americans while taxing top-earners more, yet leaves unanswered a longer-term question of taming the federal debt.

Republicans have immediately turned to their next battle -- counting on the need to raise the nation’s $16.4 trillion debt ceiling to try to force President Barack Obama to accept cuts in entitlement programs such as Medicare. Congress must act as early as mid-February to prevent a default and the dispute may reprise a similar 2011 episode that led to a downgrade of the U.S. credit rating.

“Without meaningful reform of entitlements, real spending controls, and a fairer, cleaner tax code, our debt will continue to grow, and our economy will continue to stumble,” House Speaker John Boehner said in a statement after the vote.

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Obama said he’s “very open to compromise.” Medicare spending can be reduced, he said, yet “we can’t simply cut our way to prosperity.”

The deal that cleared the House and Senate yesterday falls short of any “grand bargain” on fixing the debt that some leaders had hoped to achieve. Former Senator Alan Simpson, a Wyoming Republican, and Erskine Bowles, a chief of staff to former President Bill Clinton, co-chairmen of Obama’s deficit commission that proposed a $4 trillion solution of tax increases and spending cuts, today called the legislation “truly a missed opportunity.

Spending Cuts

The U.S. House passed a bill undoing income tax increases for more than 99 percent of households, giving a victory to Obama even as Republicans vowed to fight him in coming weeks for spending cuts in exchange for raising the debt ceiling.

The 257-167 vote just after 11 p.m. yesterday capped a tension-filled final push as Republicans balked at a bipartisan Senate bill. Boehner ordered a vote even though 151 of 236 Republicans, including Majority Leader Eric Cantor, ultimately voted no. Obama said he’d sign it into law.

Fiscal Cliff Videos:

‘‘The deficit needs to be reduced in a way that’s balanced,” Obama said at the White House. He said top earners and corporations should pay even more and that Congress must raise the debt ceiling. “Everyone pays their fair share. Everyone does their part,” he said.

Days of Drama

The final days of drama surrounding the so-called fiscal cliff of scheduled tax increases and spending cuts illustrated the partisan struggle that has made U.S. budget policy unpredictable and prone to crises as deadlines approach. Obama wielded the leverage he gained in his Nov. 6 re-election. Still, he fell short of reaching with Republicans a larger deficit- reduction grand bargain.

U.S. stocks rose, sending the Standard & Poor’s 500 Index to its biggest two-day gain since July. The S&P 500 jumped 1.7 percent to 1,450.61 at 12:58 p.m. in New York. The benchmark index is up 3.4 percent over two days. The Dow climbed 223.17 points, or 1.7 percent, to 13,327.31 today. Treasury 10-year yields climbed seven basis points, or 0.07 percentage point, to 1.83 percent at 12:41 p.m. New York time, based on Bloomberg Bond Trader data.

The largest economic impact of the budget accord will come from ending a two-percentage-point payroll tax cut, a move that will shrink paychecks for U.S. workers immediately even as most income tax cuts that expired Dec. 31 are being extended permanently.

Payroll Tax

The payroll tax cut’s lapse will pull more than $100 billion out of the economy in 2013 and is the primary reason why 77.1 percent of U.S. households will face higher taxes this year, according to the nonpartisan Tax Policy Center in Washington.

The Republican-controlled House yesterday almost unraveled a bipartisan agreement brokered over the waning days of 2012 by Vice President Joe Biden and Mitch McConnell of Kentucky, the Senate Republican leader. The Senate passed that bill 89-8 in the first hours of Jan. 1. In last night’s House vote, 85 Republicans and 172 Democrats voted for the measure, while 16 Democrats and 151 Republicans opposed it.

Compared with continuing 2012 policies, the agreement would increase taxes by $620 billion over the next decade, according to the White House. The federal budget will be $4 trillion bigger than projected had all the scheduled tax boosts been retained.

Republicans claimed a victory because the bill ends the temporary nature of most of the tax cuts that President George W. Bush campaigned on in 2000 and were scheduled to lapse at the end of 2010 and then again in 2012.

‘Making Permanent’

“We’re making permanent tax policies Republicans originally crafted,” said Representative Dave Camp, a Michigan Republican and the chairman of the tax-writing Ways and Means Committee.

In addition to tax increases on top earners, the bill extends expanded unemployment benefits and continues refundable tax credits for low-income families and college students. It would also delay by two months automatic cuts scheduled to start this month, offsetting the $24 billion cost with a blend of additional revenue and spending reductions, half of which would come from defense.

“It’s unbelievable that what you see in there is more spending as opposed to less spending,” said Representative Rob Woodall, a Georgia Republican, about the Senate-passed bill.

Boehner put the bipartisan Senate compromise to an up-or- down vote last night after it became clear that he couldn’t add spending cuts with Republican votes alone, especially with fewer than two days before the new Congress is sworn in.

House Republicans

Yesterday’s episode demonstrated again the fractiousness of House Republicans, who passed bills in 2012 that would extend the expiring tax cuts for all income levels and replace the automatic spending cuts with other policies.

They eventually ceded control of the fiscal-cliff debate to the administration and the Senate. Boehner couldn’t reach an agreement with Obama, and he couldn’t get House Republicans to back a plan that set the threshold for tax increases at $1 million in income.

Instead, at the last minute, he was forced to accept a deal that contained few of the Republican priorities he could have gotten by accepting what Obama was offering on Dec. 17.

Boehner’s Confidence

Boehner’s recent difficulty in getting his members to follow his recommendations “all rolls off his back” because “he feels pretty confident about his leadership, about the strength of his leadership,” said Florida Republican Rich Nugent, a first-year House member.

Boehner isn’t “looking over his back and worried about it, at least he doesn’t exhibit that to us,” Nugent said.

Nor should Boehner be worried about challenges to his speakership, said Nugent, a former sheriff.

“Having been a chief executive, there’s always people who agree and disagree with your leadership,” he said.

The bill would reinstate tax cuts that expired Dec. 31 on taxable income of individuals up to $400,000 and of married couples of up to $450,000, leaving those top earners with a marginal tax rate of 39.6 percent, up from 35 percent last year.

Those same households would pay higher tax rates on their dividends and capital gains, including private-equity managers’ carried-interest income. The top rate will go to 23.8 percent, including taxes from the 2010 health-care law that took effect yesterday.

Many households with incomes above $500,000 won’t face the higher rates at all, because deductions are subtracted from gross income before the rates are assessed.

Deduction Limits

Limits on itemized deductions and personal exemptions will also return, starting at $250,000 of income for individuals and $300,000 for married couples.

The deal would set the top estate-tax rate at 40 percent, splitting the difference between the parties’ positions. The per-person exemption will be more than $5 million and indexed for inflation.

The burden of higher taxes will fall hardest on the top 1 percent and particularly on the top 0.1 percent of taxpayers. Those making more than $2.7 million will pay an average of $443,910 more in 2013, or 26 percent of the additional burden, according to the Tax Policy Center. Households with income between $500,000 and $1 million will pay an average of $14,812 more.

Tax Breaks

Miscellaneous tax breaks will get extended through 2013, including the production tax credit for wind energy and the tax credit for corporate research.

The boundaries of the fiscal debate have shifted repeatedly since Congress began focusing on deficit reduction in 2010.

What’s happening instead is deficit reduction achieved in fits and starts. Democrats see a multi-stage game where they lost badly in 2011 and have now recovered their footing to insist on pairing tax increases with spending cuts.

In 2011, using the debt ceiling as leverage, Republicans got Obama to agree to more than $1 trillion in spending cuts plus another $1.2 trillion still set to start this year.

A 2011 deficit-reduction supercommittee deadlocked, pushing the issue into the 2012 election. Democrats were able to prevail only after Obama won a second term campaigning on tax increases, while Democrats gained seats in the House and Senate.

Republicans, particularly in the House, want to insist on spending cuts at every turn. Although they failed in this round, they drove that argument in last year’s debt-ceiling fight, and they will replay it in the next few weeks.

The U.S. hit the debt limit Dec. 31 and the Treasury Department began employing so-called extraordinary measures to finance about $200 billion in deficits in 2013. A debt limit increase will be needed as early as mid-February, according to the Congressional Budget Office.

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Roxana Tiron in Washington at rtiron@bloomberg.net; James Rowley in Washington at jarowley@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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