WASHINGTON—Two hours after the nation technically went over the “fiscal cliff” that has bedeviled Congress for the last several weeks, the U.S. Senate approved a plan to substantially raise taxes for the first time in 20 years.
As the New Year’s Day clock inched toward 2 a.m., two hours after a series of substantial tax increases and spending cuts were slated to take effect, senators voted 89 to 8 to allow tax rates to increase on incomes totaling more than $400,000 for individuals and $450,000 for families. The House is set to take up the measure on Tuesday.
The bill, largely brokered by Republican Senate Leader Mitch McConnell and Vice President Joe Biden, would prevent tax hikes from hitting a larger swath of Americans. But the deal is only a half-measure.
Instead of tackling the federal government’s spending problems, the deal delays for two months the automatic $110 billion in spending cuts slated to occur on Jan. 1. Those mandated cuts had combined with the scheduled year-end tax increases to form what has been dubbed the “fiscal cliff” by policy wonks who have warned that the one-two punch would hurl the nation back into a recession.
Lawmakers, in extending the expiring Bush-era tax cuts for families with incomes below $450,000, will congratulate themselves and claim they avoided the fiscal cliff. But they also once again kicked the can down the road when it comes to spending. The deal fails to reduce the nation’s deficit and sets up additional congressional showdowns, likely to occur in March, over the debt ceiling, a government shutdown, and the delayed spending reductions.
The deal hammered out by Sen. McConnell and Vice President Biden on New Year’s Eve is far from a grand bargain. As the details emerged on Monday, lawmakers from both ends of the ideological spectrum expressed reservations. Republicans were angered that it did not address entitlement reform while some Democrats bemoaned the fact that the final deal did not raise taxes on more individuals. President Barack Obama has long pledged to raise revenue by increasing taxes on those making more than $250,000.
The compromise increased the tax rate to 39.6 percent from 35 percent for the over $400,000 earners. It also raises taxes on capital gains and dividends for those households.
In a nod to President Obama’s original intent, the deal does limit personal exemptions and itemized deductions for individuals making $250,000 and $300,000 for couples. It also increases from 35 percent to 40 percent the estate tax on estates worth more than $5 million.
Some Democrats also protested these estate tax parameters, calling for similar taxes on estates worth less than $5 million. Despite the bipartisan complaints, only eight senators opposed the deal. Five Republicans voted no, including Sen. Marco Rubio of Florida, who is considered a potential presidential candidate for 2016.
Some Democrats may have protested, but the deal’s tax increases and its delaying of spending cuts can only be viewed as a victory for big government. That is why it faces a murky future in the Republican-controlled House.
Republicans supporting the plan will tout how it makes the Bush tax cuts permanent for millions of middle and lower income households. The deal also increases federal coffers by $600 billion over the next decade—less than the $1.6 trillion in revenue increases sought by Obama.
But, despite these victories, many House Republicans, who voted down a tax increase for millionaires just before Christmas, likely will attack the Senate-passed deal for its failure to decrease the deficit or to tackle entitlement reform.
House Speaker John Boehner, R-Ohio, said in a statement that “decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members—and the American people—have been able to review the legislation.”
A hint at fiscal conservatives reaction to the deal could be found in the statement of opposition released Monday by Heritage Action. “This kick-the-can approach, necessitated by a president who refuses to stop campaigning and start seriously addressing our nation’s fiscal problems, is not an adequate solution to America’s coming fiscal crisis, which is a result of overspending, not under-taxing,” the conservative group said in a written statement in which it warned that the vote would be included in their annual rating of lawmakers.
The early morning Senate vote capped a 24-hour period that was busier in Washington than the normal New Year’s Eve. It included a campaign-style rally held by Obama at the White House that featured as living props a contingent of middle-income Americans facing a tax increase at midnight. While members of Congress negotiated, Obama lectured them from afar.
“One thing we can count on with respect to this Congress is that if there’s even one second left before you have to do what you’re supposed to do, they will use that last second,” he said during a ribbing that irked many lawmakers from both parties on Capitol Hill.
Obama said he had hoped for a larger deal that included tax increases and spending reductions, but then he blamed Congress for a failure to fashion such a comprehensive deal: “With this Congress, that was obviously a little too much to hope for at this time.”
Those gathered at the White House laughed. But Republican lawmakers on Capitol Hill have long been skeptical of Obama’s desire to tackle spending.
Obama and congressional lawmakers will soon get a chance to act on their spending-cut promises. Congress is set to hold a series of fiscal battles in the coming months. Democrats will again ask for an increase in the debt ceiling while Republicans will seek matching spending cuts. It will also include another government shutdown fight like the one that took place in the summer of 2011. And in March lawmakers will face the newly set cliff for the scheduled spending cuts to the Defense Department and other parts of government. The initial fiscal cliff included an 18-month timetable for negotiations, and all that led to was a tax hike and a new cliff on spending cuts set just eight weeks from now.
The New Year began with a tax increase for top earners, but that deal has paved the way for a series of tough budget votes in 2013. But one budget issue has been resolved: the tax hike deal cancels a set pay raise for members of Congress. That is at least one portion of the deal that every American will likely applaud.