In the early morning hours of New Year’s Day the Senate overwhelmingly supported a deal to avoid the automatic tax hikes and spending cuts scheduled to take place January 1, 2013, known as the fiscal cliff, by a vote of 89-8.
The vote followed hours of discussion behind closed doors but only 10 minutes of formal floor debate, and the plan passed without being scored by the Congressional Budget Office. However, the Joint Committee on Taxation did review the plan and estimated that it would cut federal revenue by $3.93 trillion over the next decade compared to current law.
Eight Senators voted no on the bill while two, both Republicans, missed the vote. Those voting against the plan included three Democrats and five Republicans: Sens. Michael Bennet (D-Colo.), Tom Carper (D-Del.), Chuck Grassley (R-Iowa), Tom Harkin (D-Iowa), Mike Lee (R-Utah), Rand Paul (R-Ky.), Marco Rubio (R-Fla.) and Richard Shelby (R-Ala.).
Sens. Jim DeMint (R-S.C.), Mark Kirk (R-Ill.) and Frank Lautenberg (D-N.J.) missed the vote.
The Republican controlled House now has to approve the legislation to prevent the automatic tax increases and across the board spending cuts set to move forward as scheduled if no plan is passed. It is unclear when the House will vote on the Senate plan, but House Republicans began to gather to discuss the issue at 1 p.m. in a special session called for New Years Day.
Senate Democrats had a 90-minute meeting that ended shortly before midnight that closed the deal hammered out between Vice President Biden and Senate Republican Leader Mitch McConnell (Ky.). The passage of the bill is seen as a significant achievement for Biden who has said he may run for president in 2016. Biden stepped in after talks collapsed between Senate Majority Leader Harry Reid (D-Ca.) and McConnell.
The legislation permanently extends the Bush-era tax rates on individuals earning up to $400,000 and family income up to $450,000.
The estate tax rate will be set permanently at 40 percent, up from 35 percent now, and will exempt inheritances below $5 million.
Unemployment benefits will be extended for one year. The extension would prevent an estimated 2 million people from falling off the rolls and losing their government assistance.
The automatic spending cuts (Sequester) would be delayed for two months and would be offset by a mix of spending cuts and new revenues.
It also stops an increase in congressional pay that President Obama had authorized through executive order raising federal worker pay.
The bill includes a number of tax rate extensions, including five-year extensions of the college tuition tax credit, the child tax credit and the earned income tax credit, which were part of the 2009 economic stimulus package.
Capital gains and dividends tax rate would be set at 20 percent, up from 15 percent.
The Senate bill includes a number of additional steps including: reinstating the Clinton-era limit itemized deductions for individuals earning over $250,000 and families earning over $300,000, permanently patches the Alternative Minimum Tax and extends expiring business and energy tax provisions for one year, one-year extension of the 2008 farm bill without dairy reforms- which stops a possible doubling of milk prices but does not include reforms and $24 billion in deficit reduction ordered in a Senate passed five-year bill.
The plan is light on spending cuts, which has resulted in House Republicans speaking out against the Senate bill already. Conservative advocacy groups like Heritage Action for America have urged lawmakers not to approve the deal.
HAA Statement Excerpt:
“To be clear, this is a tax increase. In 2013, the top marginal rate, death tax, and taxes on long-term capital gains and dividends will all be higher than in 2012.”
Many liberal groups and unions are opposing passage arguing that Obama and the Democrats are giving in on too much. They feel Obama needs to honor his pledge to raise tax rates on households with income above $250, 000, and are not happy about the agreed upon levels of $400,000/$450,000.
MoveOn.org, a left leaning non-profit organization, was very clear about their disappointment.
Justin Ruben, Executive Director of the group, released a statement that said in part “We just finished an election in which the American people made clear that they want the wealthiest 2 percent to finally pay their fair share of taxes, but this agreement fails to meet that test. Voters gave President Obama a mandate to end the Bush tax cuts for those making more than $250,000. He has not delivered.”
There will be members from both parties that are unhappy with the deal, but both Democratic and Republican senators believe it was better to take a deal than to go over the fiscal cliff.
“There is a feeling, again, that it’s not that this proposal is regarded as great or is loved, in any way, but it’s a lot better than going over the cliff,” Sen. Charles Schumer (D-N.Y.) said.
Sen. Kay Bailey Hutchison (R-Texas) said: "It's not something that any of us would say, 'Oh, I love it.' I don't love it, but I think it is a very good job of negotiating where there are some wins and some losses and it's about even."
There is no doubt the more fiscally minded Republicans will not be happy with the Senate deal due to the lack of spending cuts combined with tax hikes, and the more left leaning Democrats will be disappointed about the income levels that will have higher tax rates, but the plan does address permanently some issues that have been continuous drags on the economy, while also locking in a variety of tax rates so that those battles will not have to be fought again.
To all those opposed to the passage of this legislation, consider what will happen if fails to pass:
Eliminate 2001and 2003 tax cuts for Americans with incomes below $250,000 at a cost of $174 billion to the economy.
Alternative Minimum Tax will not be adjusted for inflation. This will be a cost to the economy of $59 billion.
Social Security tax cut ends and will be a cost to the economy of $100 billion.
Eliminate 2001 and 2003 tax cuts for Americans with incomes above $250,000 at a projected cost to the economy of $40 billion.
Affordable Care Act taxes take effect at a cost of $9 billion to the economy.
Across-the-board cuts take effect and would be a cost to the economy of $105 billion.
Emergency Unemployment Benefits would end, at a cost to the economy of $58 billion.
Medicare payments to doctors reduced at a cost of $9 billion to the economy.
If the tax hikes and spending cuts actually take place as scheduled most economists believe the nearly $560 billion that would be removed from the economy would trigger another recession, and could result in as much as a 3.6 percent decline in GDP in 2013.
While the Senate deal is not perfect-far from it-it is better than the known alternative.