The U.S. Senate overwhelmingly passed a deal early this morning to cut taxes to Bush-era rates for all income categories below $450,000 per household ($400,000 for individuals). The Senate vote came too late to avert the midnight “fiscal cliff” deadline, and the deal must still pass the House of Representatives later today. The deal will also delay the deep spending cuts in the “sequester,” including defense cuts,” by two months.
The fact that the vote happened after midnight may have helped assist its passage, since Senators were no longer voting for a tax hike on the wealthiest earners but rather on a tax cut for everyone else. Five Republicans opposed the deal–including Sen. Marco Rubio (R-FL) (FL), Sen. Rand Paul (R-KY) (KY), and Sen. Mike Lee (R-UT) (UT), three Tea Party favorites. Three Democrats, including Tom Harkin (IA), who had signaled his opposition, also voted no.
Other provisions of the deal include an extension of unemployment benefits, without corresponding spending cuts elsewhere. The payroll tax relief that wage earners have enjoyed for two years was not extended and will expire, meaning that many working Americans will still feel a bigger dent in their first paychecks of 2013, while those out of work may experience a lower incentive to seek new job opportunities, as federal deficits rise.
In addition, the capital gains tax will rise from 15 to 20 percent; the inheritance tax will rise from 35 percent to 40 percent on amounts over $10 million; and many families will be spared the Alternative Minimum Tax.
The total revenue increase in the deal amounts to $600 billion–far less than the $800 billion than Speaker of the House John Boehner had initially offered in a broader proposal. Some Democrats believed that President Obama, who was largely absent from the “fiscal cliff” talks, had not negotiated well. Republicans, meanwhile, worried about the disproportionate ratio of tax increases to spending cuts; spending is barely reduced at all.
Passage in the House of Representatives is likely, but not certain, as reports have emerged that Speaker Boehner may not have the support of a majority of his Republican caucus for the deal. The Speaker may have to seek votes from Democrats to secure passage–something he promised earlier that he would not do.
The tough confrontations of recent years will continue, as Congress will immediately turn to the thorny issue of the debt ceiling. The federal government reached its $16.4 trillion borrowing limit yesterday, according to the Treasury, and resorted to “extraordinary” measures to continue funding the government. Republicans are expected to take an even harder line against a debt limit increase than they did in the summer of 2011.