US Congress avoids fiscal cliff tax hikes

2013-01-02 08:36

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Washington — A weary Congress sent President Barack Obama legislation to avoid the economy-threatening "fiscal cliff" of middle-class tax increases and across-the-board spending cuts late on Tuesday night hours before financial markets reopen after the New Year's holiday.

The bill's passage on a 257-167 vote in the House of Representatives sealed a hard-won political triumph for the president less than two months after he secured re-election while calling for higher taxes on the wealthy.

Moments later, Obama strode into the White House briefing room and declared, "Thanks to the votes of Republicans and Democrats in Congress I will sign a law that raises taxes on the wealthiest 2% of Americans while preventing tax hikes that could have sent the economy back into recession."

He spoke with Vice President Joe Biden at his side, a recognition of the former senator's role as the lead Democratic negotiator in final compromise talks with Senate Republican Leader Mitch McConnell of Kentucky.

The economic as well as political stakes were considerable. Economists have warned that without action by Congress, the tax increases and spending cuts that technically took effect with the turn of the new year at midnight could cause unemployment to spike and send the economy into recession.

The extraordinary late-night House vote took place less than 24 hours after the Senate passed the measure in the pre-dawn hours on New Year's Day. The legislation cleared the Senate hours after Biden and McConnell, veteran negotiators, sealed a deal.

Upper ranks split

In addition to neutralising middle class tax increases and spending cuts that technically took effect on Monday at midnight, the legislation raises tax rates on incomes over $400 000 for individuals and $450 000 for couples.

Remarkably, in a party that swore off tax increases two decades ago, dozens of Republicans supported the bill in both houses of Congress.

The Senate approved the measure on a vote of 89-8 less than 24 hours earlier, and in the interim, rebellious House conservatives demanded a vote to add significant spending cuts to the measure. But in the end they retreated.

The measure split the upper ranks of the Republican leadership in the House.

Speaker John Boehner of Ohio voted in favour, while Majority Leader Eric Cantor of Virginia and California Representative Kevin McCarthy, the party's whip, opposed the bill.

Supporters of the bill in both parties expressed regret that the bill was narrowly drawn, and fell far short of a sweeping plan that combined tax changes and spending cuts to reduce federal deficits.

Permanent relief for middle class

That proved to be a step too far in the two months since Obama called congressional leaders to the White House for a post-election stab at compromise.

Majority Republicans did their best to minimise the bill's tax increases, just as they abandoned their demand from earlier in the day to add spending cuts to the package.

"By making Republican tax cuts permanent, we are one step closer to comprehensive tax reform that will help strengthen our economy and create more and higher paychecks for American workers," said Representative Dave Camp of Michigan, chairperson of the tax-writing House Ways and Means Committee.

He urged a vote for passage to "get us one step closer to tax reform in 2013" as well as attempts to control spending.

House Democratic Leader Nancy Pelosi also said the legislation included "permanent tax relief for the middle class", and she summoned lawmakers to provide bipartisan support as the Senate did.

The bill would prevent an expiration of extended unemployment benefits for an estimated two million jobless, renew tax breaks for businesses and renewable energy purposes, block a 27% cut in fees for doctors who treat elderly Medicare patients, stop a $900 pay increase for lawmakers from taking effect in March and head off a threatened spike in milk prices.

Taxes still on the rise

The bill would also raise the top tax rate on large estates to 40%, from 35%, and taxes on capital gains and dividends over $400 000 for individuals and $450 000 for couples would be taxed at 20%, up from 15%.

It would stop $24bn in spending cuts set to take effect over the next two months, although only about half of that total would be offset with spending reductions elsewhere in the budget.

Even with enactment of the legislation, taxes are on the rise for millions.

A 2 percentage point temporary cut in the Social Security payroll tax, originally enacted two years ago to stimulate the economy, expired with the end of 2012. Neither Obama nor Republicans made a significant effort to extend it.

The fiscal cliff measure had cleared the Senate on a lopsided pre-dawn New Year's vote of 89-8, and House Republicans spent much of the day struggling to escape a political corner they found themselves in.

"I personally hate it," Representative John Campbell of California, said of the measure, giving voice to the concern of many Republicans that it did little or nothing to cut spending.

May have to start all over

Cantor, the No 2 House Republican, told reporters at one point, "I do not support the bill. We are looking, though, for the best path forward."

Within hours, Republicans abandoned demands to add spending cuts to the bill and agreed to a simple yes-or-no vote on the Senate-passed bill.

They feared that otherwise the Senate would refuse to consider any alterations, sending the bill into limbo and saddling Republicans with the blame for a whopping middle class tax increase.

One Senate Democratic leadership aide said Majority Leader Harry Reid would "absolutely not take up the bill" if the House changed it. The aide spoke on condition of anonymity, citing a requirement to keep internal deliberations private.

If the House failed to pass the Senate bill it would mean that any fiscal deal would have to start all over when a new Congress, with dozens of new members, is seated on Thursday. And any change in the legislation would require the Senate to re-pass the measure before it could go to Obama for his signature.

Despite Cantor's remarks, Boehner took no public position on the bill as he sought to negotiate a conclusion to the final crisis of a two-year term full of them.

Sticking point

House Democrats met privately with Biden for their review of the measure, and the party's leader, Pelosi, said afterward that Boehner should permit a vote.

The non-partisan Congressional Budget Office said the measure would add nearly $4 trillion over a decade to federal deficits, a calculation that assumed taxes would otherwise have risen on taxpayers at all income levels.

There was little or no evident concern among Republicans on that point, presumably because of their belief that tax cuts pay for themselves by expanding economic growth and do not cause deficits to rise.

The relative paucity of spending cuts was a sticking point with many House Republicans. Among other items, the extension of unemployment benefits costs $30bn, and is not offset by savings elsewhere.

For all the struggle involved in the legislation, even its passage would merely clear the way for another round of controversy almost as soon as the new Congress convenes.

With the Treasury expected to need an expansion in borrowing authority by early spring, and funding authority for most government programs set to expire in late March, Republicans have made it clear they intend to use those events as leverage with the administration to win savings from the Medicare health care program for the elderly and other government benefit programmes.

Saved by Obama, Congress

McConnell said as much moments before the 02:00. Tuesday vote in the Senate — two hours after the advertised "cliff" deadline.

"We've taken care of the revenue side of this debate. Now it's time to get serious about reducing Washington's out-of-control spending," he said. "That's a debate the American people want. It's the debate we'll have next. And it's a debate Republicans are ready for."

The "fiscal cliff" came about because tax rate cuts enacted in 2001 and 2003 during President George W Bush's administration were set to expire at the end of the year.

The threatened across-the-board reductions in government spending, which would slice money out of everything from social programmes to the military, were put in place last year as an incentive to both parties to find ways to cut spending.

That solution grew out of the two parties' inability in 2011 to agree to a grand bargain that would have taken a big bite out of the deficit which has averaged about $1 trillion a year.

If Obama and Congress failed to act, about $536bn in tax increases, touching nearly all American workers, and about $110bn in spending cuts, about 8% of the annual budgets for most federal departments, were scheduled to start going into effect beginning in January.

- AP

Read more on:    barack obama  |  us  |  economy
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