Furious last-minute negotiations between the White House and the Senate Republican leadership Monday secured a tentative agreement to allow tax rates to rise on affluent Americans, but the measure was not going to pass in time for Congress to meet its Dec. 31 deadline for averting automatic tax increases and spending cuts deemed a threat to the economy.
While some senators pushed for a quick vote on legislation to avoid the so-called fiscal cliff, the House was not expected to consider any deal until Tuesday at the earliest, meaning that a combination of tax increases and spending cuts would go into effect in the first days of 2013. If Congress acts quickly and sends a deal to President Barack Obama, the economic impact could still be very limited.
Under the agreement, tax rates would jump to 39.6 per cent from 35 per cent for individual incomes more than $400,000 and couples more than $450,000, while tax deductions and credits would start phasing out on incomes as low as $200,000, a clear win for Obama, who campaigned on higher taxes for the wealthy.
“Just last month Republicans in Congress said they would never agree to raise tax rates on the wealthiest Americans. Obviously, the agreement that’s currently being discussed would raise those rates and raise them permanently,” Obama said at a hastily arranged news briefing, with middle-income onlookers cheering behind him.
In a development that pushed lawmakers closer to a resolution, Senate Republicans said negotiators also agreed to put off $110 billion in across-the-board cuts to military and domestic programs for two months while broader deficit reduction talks continue. Those cuts begin to go into force Wednesday, and that deadline too might be missed before Congress approves the deal.
The nature of the deal ensured that the running war between the White House and congressional Republicans on spending and taxes will continue at least until the spring. Treasury Secretary Timothy F. Geithner formally notified Congress that the government reached its statutory borrowing limit on New Year’s Eve. Through some creative accounting tricks, the Treasury Department can put off action for perhaps two months, but Congress must act to keep the government from defaulting just when the “pause” on pending cuts is up. Then in late March, a temporary law financing the government expires.
And the new deal does nothing to address the big issues that Obama and Speaker John A. Boehner hoped to deal with in their failed “grand bargain” talks two weeks ago: booming entitlement spending and a tax code so complex few defend it anymore.
Although the tentative deal had a chance of success, it landed with a thud on Capitol Hill. Republicans accused the White House of “moving the goal posts” by demanding still more tax increases to help shut off across-the-board spending cuts beyond the two-month pause. Democrats were incredulous that the president had ultimately agreed to around $600 billion in new tax revenue over 10 years when even Boehner had promised $800 billion. But the White House said it had also won concessions on unemployment insurance and the inheritance tax among other wins.
Still, Democrats openly worried that if Obama could not drive a harder bargain when he holds most of the cards, he will give up still more Democratic priorities in the coming weeks, when hard deadlines will raise the prospects of a government default first, then a government shutdown. In both instances, conservative Republicans are more willing to breach the deadlines than in this case, when conservatives cringed at the prospects of huge tax increases.
“I just don’t think Obama’s negotiated very well,” said Sen. Tom Harkin, D-Iowa.
But as night fell over Washington on New Year’s Eve, senators seemed worn down and resigned.
“Everybody by this time is angry, but sooner or later this has to be resolved,” said Sen. Orrin G. Hatch of Utah, the ranking Republican on the Senate Finance Committee.
Even House Republicans signaled that enough of them, in combination with Democrats, could most likely pass it, just weeks after Republicans shot down Boehner’s proposal to raise taxes only on incomes more than $1 million.
“I don’t want to say where I am until I read the legislation, but it is certainly better than the alternative,” said Rep. Charlie Dent, R-Pa.
With a deal agonizingly close, officials in Washington still prepared for the worst. The Defense Department prepared to notify all 800,000 of its civilian employees that some of them could be forced into unpaid leave without a deal on military cuts. The Internal Revenue Service issued guidance to employers to increase withholding from paychecks beginning Tuesday to match new tax rates at every income level.
“No deal is the worse deal,” said Sen. Joseph I. Lieberman, I-Conn., rejecting the assertions of liberal colleagues that no deal would be better than what they would see as a bad deal.
Even after dark, however, new wrenches were gumming up the machinery. Democrats put out late word that Republicans wanted the threshold at which inherited estates would be taxed to be indexed to inflation, a nonstarter for them. Republicans said they needed to see what cuts would pay for the $24 billion needed to put off across-the-board spending cuts.
But with Republicans and Democrats grumbling, it was clear that a deal hashed out through intense talks between Vice President Joe Biden and Sen. Mitch McConnell of Kentucky, the Republican leader, had given both sides provisions to cheer and provisions to jeer.
Under the deal, income taxes would rise to 39.6 per cent from 35 per cent on income more than $400,000 for single people and $450,000 for couples. Above those income levels, dividends and capital gains tax rates would also rise, to 20 per cent from 15 per cent.
An official familiar with the negotiations stressed that taxes would rise in some sense on the top 2 per cent of earners, as Obama has wanted since his first presidential campaign in 2008. That is because the deal would reinstate provisions to tax law, ended by the Bush tax cuts of 2001, that phase out personal exemptions and deductions for the affluent. Those phaseouts, under the agreement, would begin at $250,000 for single people and $300,000 for couples.
The estate tax would also rise, but considerably less than Democrats had wanted. The value of estates more than $5 million would be taxed at 40 per cent, up from the current 35 per cent. Democrats had wanted a 45 per cent rate on inheritances larger than $3.5 million.
Under the deal, the new rates on income, investment and inheritances would be permanent, as would a provision to stop the alternative minimum tax from hitting middle-class families.
Obama and the Democrats would be granted a five-year extension of tax cuts they won in the 2009 stimulus law for middle-class and working-poor taxpayers. Those include a child credit that goes out as a check to workers who do not earn enough money to pay income taxes, an expanded earned income credit and a refundable credit for tuition.
Democrats also secured a full year’s extension of unemployment insurance without strings attached and without offsetting spending cuts, a $30 billion cost.
(Jennifer Steinhauer and Robert Pear contributed reporting.)
© 2012, The New York Times News Service