Following a day of intense drama in Capitol Hill as financial markets warily watched, the U.S. House last night approved of a compromise package that avoids what would have been a punishing combination of tax increases and federal budget cuts.
By a vote of 257-167, the House approved the same measure passed in the early morning hours of Tuesday by the Senate. It will raise $620 billion in new tax revenue during the next decade by increasing income tax rates on households earning more than $450,000 a year while permanently extending income tax rates for families earning less than that amount a year.
By doing so, the House would avoid what was expected to be a meltdown today on Wall Street. Investors had feared that Washington had descended into such chaos that neither President Barack Obama nor Congress could prevent the economy from toppling over what has become known as the fiscal cliff.
Earlier in the afternoon, House Republicans appeared on the verge of revolt, warning that the Senate bill did little to curb federal spending. They pointed to a fresh Congressional Budget Office report that the measure would add $4 trillion to the government’s publicly held debt during the next decade.
“If it’s just a pure tax bill – a bill to cut taxes, it’d be okay,” said Rep. Jim Renacci, R-Wadsworth. “It’s the spending side that’s the problem.”
In the end, House Democrats pushed the bill over the top, overwhelmingly supporting it while Republicans opposed the bill by a nearly two to one margin. Rep. Mike Turner, R-Centerville, was among those to oppose the bill. In a meeting with House Republicans earlier in the day, he cited concerns about sweeping, across-the-board spending cuts, known as the sequester, which he worried would have a significant impact on Wright-Patterson Air Force Base.
“We need to take meaningful action against the sequester,” he said.
Under the sequester, half of the $1.2 trillion in budget reductions during the next decade would be shouldered by the Pentagon. Turner, a member of the House Armed Services Committee, said the cuts could affect thousands of jobs at Wright-Patterson Air Force Base, the state’s largest single-site employer.
The bill would provide an additional $620 billion in new tax dollars to the federal treasury during the next decade. But because the White House and Senate agreed to delay for two months the first of $1.2 trillion in automatic spending cuts scheduled during the next decade, the bill only reduces the deficit by $24 billion by March, of which $6 billion would come from the Pentagon.
Vice President Joe Biden met privately with House Democrats yesterday, who seemed ready to vote. House Minority Leader Nancy Pelosi, D-Calif., called on Boehner to permit a floor vote, telling reporters “that is what the speaker said. That is what the American people deserve.’’
The CBO projections of adding $4 trillion to the government’s debt were expected because the only way Congress could have dramatically reduced the deficit during the next decade was by allowing the tax increases to expire on all Americans, not simply the richest families.
But because the bill would end the 2-percent Social Security payroll tax that has been in effect the past two years, the non-partisan Tax Policy Center in Washington concluded that more than 75 percent of American households would see a payroll tax increase. The organization projects that someone earning $64,000 a year would pay an additional payroll tax this year of $834.
In addition, the agreement passed on changes in the entitlement programs of Social Security, Medicare and Medicaid, which are driving the huge federal deficit.
Without any changes, by the year 2025, virtually all federal tax dollars will be used to finance entitlements and interest on the publicly held debt. That means the only way the government will be able to finance national defense or social programs for the poor is through borrowing.
Sen. Rob Portman, R-Ohio, who voted for the bill, had urged that Congress and the White House use the fiscal cliff as a way to forge a sweeping compromise to tame the budget deficit. After the vote, he said Obama and Congress “must move forward on pro-growth tax reform and reform of the important but unsustainable entitlement programs.’’
The overwhelming Senate vote at 1:39 a.m. yesterday intensified pressure on House Republicans who faced the choice of approving the bill or amending it and possibly sending the U.S. toppling over the cliff.
Not only could that have tipped the economy into its second recession in four years, but it could inflict major damage upon the 401K and individual retirement accounts held by millions of Americans.
But even though 89 senators approved the package, it was clear many had misgivings. Sen. Sherrod Brown, D-Ohio, acknowledged that “this deal isn’t perfect.’’ But he said “it represents an important down payment in reducing the deficit … by asking millionaires and billionaires to pay their fair share.’’
The eleventh-hour agreement negotiated by Biden and Senate Minority Leader Mitch McConnell made permanent nearly all the 2001 income tax reductions signed into law by former President George W. Bush and scheduled to expire yesterday.Obama had demanded that Congress allow those tax reductions to expire on households earning more than $250,000 a year. But because of the combined opposition of virtually every Senate Republican and the likely opposition of half-a-dozen Senate Democrats, the $250,000 threshold almost certainly would have been rejected by both the House and Senate.
Instead, Biden and McConnell agreed to extend the 2001 income tax cuts for households earning $450,000 a year – a major concession by the White House. For families earning $450,000 a year, their tax rate climbs from 35 percent to 39.6 percent.
They also agreed to limit the value of some deductions for families earning more than $300,000, and will boost the taxes on dividends and capital gains – which are the profit from the sale of stocks and real estate – from 15 percent to 20 percent for the wealthiest of families.
The tax on estates worth more than $5 million will rise from 35 percent to 40 percent. But that was a lower tax rate than Obama had demanded.
The measure also extends unemployment insurance for two million people during the next year. And it shields 30 million Americans this year from paying the alternative minimum tax.