Pluses and Minuses of the Fiscal Cliff Bill

Wednesday, January 2, 2013 at 8:24 PM by

In the spirit of the New Year, I’m going to try today to take a mostly positive look at the deal reached to avoid the “fiscal cliff.”  But be forewarned – later this week I’ll revert to my usual pessimistic outlook by looking beyond the short-term pluses of the bill and focusing instead on the framework it sets for the next round of budget negotiations, including the looming debate on the federal debt ceiling. 

From a short-term perspective, I think it’s a pretty good compromise.  Not surprisingly, it accomplishes a number of things that nearly all federal lawmakers supported:

  • Extending the Bush tax cuts for middle-income taxpayers.
  • Continuing for one year the current Medicare reimbursement rates for physicians participating in Medicare, in order to avoid a 26.5% cut in those rates.
  • Extending the 2008 Farm Bill — albeit, only until the end of September (the close of the current federal fiscal year).
  • Delaying the broad cuts known as the sequester, though only for two months, to provide time to try to agree upon a more targeted and less controversial set of budget cuts.

Democrats won a number of concessions – at least over the short term.  These include:

  • Ending the Bush tax cuts for income in excess of $400,000 for individuals and $450,000 for married couples filing jointly, and reducing the tax break for dividend and capital gains income for people over those income levels.   
  • Extending federal unemployment benefits for the next 12 months.
  • Continuing for five years (through 2017) the Recovery Act’s enhancements to the refundable tax credits for low-income working families (the federal EITC and Child Tax Credit). 
  • Extending for five years the American Opportunity Tax Credit, which provides a credit of up to $2,500 for tuition and related higher education expenses.
  • Extending through 2013 a number of individual and business tax credits for investments in alternative energy and energy efficiency.
  • Extending Transitional Medical Assistance (TMA) through the end of 2013.

 Republicans also prevailed on a number of significant issues, including:

  • Exempting from federal estate taxes the first $5 million of an individual’s estate (and $10 million for married couples), and making that a permanent exemption that rises with inflation.
  • Decreasing the number of high-income taxpayers who will face higher taxes by extending the Bush tax breaks for all income up to $400,000 for individuals and $450,000 for couples.
  • Protecting most of the tax break for dividend income and capital gains.
  • Extending various business tax breaks.
  • Permanently raising the threshold for the alternative minimum tax (at a cost of $1.8 trillion over the next 10 years).  
  • Creating a substantial new tax break for the wealthy by allowing them to shift funds from 401(k) accounts and similar retirement accounts into Roth accounts (which yields a short-term revenue increase for the federal treasury, and a much larger revenue loss down the road).  
  • Limiting the duration of many of the extensions sought by Democrats. 
  • Repealing the statutory authority for creation of a long-term care insurance program, known as Community Living Assistance Services and Supports (CLASS).

In general, I think it was a balanced package and I was relieved to see that federal lawmakers can still sometimes find middle ground.   But there are a couple of huge omissions from the deal, including the fact that it doesn’t address the debt ceiling or resolve concerns about the sequester.  In addition, legislators of both parties seemed to be willing to allow the reduction in payroll tax withholding to expire.  

In Friday’s blog post I’ll look at the implications of those omissions and the prospects for the next round of negotiations, which will have to begin very soon.

You can find a comprehensive (19-page) summary of the bill here.

Jon Peacock

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