WASHINGTON—US lawmakers who hoped to resolve any uncertainty over the so-called “fiscal cliff” before financial markets reopen Wednesday ran into trouble, as the Republican-controlled House of Representatives objected to legislation approved by the Senate in a last-minute New Year’s drama unlike any other in the history of Congress.
Americans continued to wonder whether taxes would go up on almost everyone, and deep spending cuts would kick in, if the deal to avoid that scenario fell apart. The No 2 House Republican, Eric Cantor, emerged from a party meeting yesterday afternoon to say, “I do not support the bill.” Lawmakers indicated they wanted more spending cuts in the largely tax-focused legislation and wanted to send it back to the Senate. House Republican leaders continued to meet.
They had very little time. Rejection by the House would mean that any fiscal deal would have to start all over when a new Congress, with dozens of new members, is seated Thursday. And any change in the legislation would require the Senate to re-pass the measure before it could go to President Barack Obama for his signature. House approval of the existing bill would move it straight to the president.
The legislation at issue was only part of the grand deal Obama had hoped to make with lawmakers on addressing the country’s chronic deficit spending. That means his administration and a bitterly partisan Congress face more showdowns on fiscal issues in the months ahead. Economists, who had warned that the “fiscal cliff” would spin the country back into recession, were warning that even a limited agreement to avoid it could still dent economic growth.
The deal under consideration Tuesday tackled one of the most sensitive issues: higher taxes. The measure would be the first significant bipartisan tax increase since 1990. It would prevent taxes from going up on the poor and middle class but would raise rates on households making more than US$450,000 a year.
It also would also put off for two months more than US$100 billion in automatic spending cuts that were set to hit the Pentagon and domestic programs starting this week, and it would extend unemployment benefits for the long-term unemployed.
The spending cuts will have to be addressed in the coming weeks and months, along with an increase in the government’s borrowing limit as it seeks to pay its bills. The midnight deadline Monday had been set back in 2011 as motivation for the Obama administration and Congress to get serious about taking sweeping action to address deficit spending that has averaged about US$1 trillion a year.
The measure cleared the Democrat-controlled Senate on an 89-8 vote not long after midnight Tuesday, hours after Vice President Joe Biden and Senate Republican Leader Mitch McConnell, veteran negotiators, sealed a deal. The top Republican in Congress, House Speaker John Boehner, pointedly refrained from endorsing the agreement, though he promised a vote on it or a Republican alternative right away. He was expected to encounter opposition from House conservatives, who oppose any tax increase at all.
Obama, who had campaigned for re-election on the promise of protecting households making under US$250,000 a year from a tax increase, praised the agreement after the Senate’s vote. Some liberal Democrats were disappointed that the White House did not stick to a harder line in negotiations, considering that Obama no longer faces re-election.
“While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay,” Obama said in a statement. “This agreement will also grow the economy and shrink our deficits in a balanced way—by investing in our middle class, and by asking the wealthy to pay a little more.”
But the measure was not balanced enough to shrink the federal deficit. The nonpartisan Congressional Budget Office said it would add nearly US$4 trillion over a decade, a calculation that assumed taxes would otherwise have risen on taxpayers at all income levels.
The sweeping Senate vote exceeded expectations and would appear to give momentum to the measure despite lingering questions in the House, where conservative forces sank a recent bid by Boehner to permit taxes to rise on incomes exceeding US$1 million, returning them to Clinton-era levels of the 1990s.
Even die-hard conservatives in the Senate endorsed the measure, arguing that the alternative was to raise taxes on virtually every earner. “I reluctantly supported it because it sets in stone lower tax rates for roughly 99 per cent of American taxpayers,” said Sen. Orrin Hatch. “With millions of Americans watching Washington with anger, frustration and anxiety that their taxes will skyrocket, this is the best course of action we can take to protect as many people as possible from massive tax hikes.”
Other features of the measure:
• It would raise the top tax rate on large estates to 40 per cent, from 35 per cent.
• Taxes on capital gains and dividends over US$400,000 for individuals and US$450,000 for couples would be taxed at 20 per cent, up from 15 per cent.
• Jobless benefits for the long-term unemployed would be extended for an additional year at a cost of US$30 billion.
• Another US$64 billion would go to renew tax breaks for businesses and for renewable energy purposes, like tax credits for energy-efficient appliances.