Fixing the Debt: Update on U.S. Fiscal Cliff Crisis (7th Edition) - December 31, 2012

ZEROING IN ON A DEAL


  • Vice President Biden and Senate Republican Leader McConnell are close to reaching a deal to avert the fiscal cliff.  Discussions between the two began late yesterday afternoon and have continued throughout last night and into this afternoon.  By all accounts, a deal is close but not yet finalized, with at least one issue outstanding relating to how to pay for a short-term delay of the spending sequester.
  • President Obama held a 10-minute news conference at 1:45 this afternoon in which he said that a deal is near, though not yet resolved.  He reiterated that his most immediate priority is to prevent taxes from going up tomorrow on middle class families.  He also stated that he will insist that any further deficit reduction to follow next year include not only spending cuts, but also further tax revenue.  
  • The Senate Democratic and Republican caucuses are expected to meet this afternoon to discuss putting the agreement on the Senate floor for a vote later today or tomorrow.  Expediting a vote in this timeframe will take unanimous consent by all Senators.  It is unclear whether the deal, when it is finalized, will attract significant support from both parties.
  • The House will likely not decide how to handle such legislation until it first passes the Senate.  The House Republican conference may meet shortly after the Senate votes to discuss the situation further.  The House position on the bill may well depend on the size of the Senate vote (and whether a large number of Senate Republicans vote for it).
  • While elements of a deal are always subject to change prior to a deal being finalized, sources confirm that items likely to be included in a potential deal include:
    • Permanent extension of the middle class tax cuts at income levels of $400,000 (for individual taxpayers) and $450,000 (for couples).
    • Permanent extension of capital gains and dividend tax rates with a 20% rate for those earning in excess of $400,000/$450,000, and a maximum 15 percent rate for all other taxpayers  (Note: this almost certainly excludes the 3.8 percent Medicare tax on investment income that takes effect in 2013 for those with income above $200k/$250k).
    • Permanent patch of the AMT, indexed to inflation.
    • Permanent estate tax parameters with a $5.12 million individual exemption (likely indexed to inflation) and a 40 percent maximum rate above the exemption amount (up modestly from the existing 35 percent maximum rate).  
    • Reinstatement of the limitations on itemized deductions and personal exemptions for taxpayers with income above $250,000/$300,000 (PEP and Pease).
    • Extension of unemployment benefits for one year, not offset.
    • Extension of the Doc Fix for one year, offset.
    • Extension of most of the business and individual tax “extenders,” through 2013, as passed by the Senate Finance Committee in early August (two years for provisions that expired 12/31/11, one year for those expiring 12/31/12).
    • Five-year extension of some refundable tax credits created in the 2009 stimulus bill, including child tax credit and EITC provisions.
    • An extension of the current farm bill (likely for one year).
    • A one-year extension of bonus depreciation.
    • It is not yet clear whether the agreement will include a short-term sequester delay (likely in the range of 60 days), but it is likely that if such a delay is included it will be offset, and probably by spending reductions.
    • As widely expected, the deal, should it be finalized, will not include new debt ceiling authority, meaning that in February or March Congress and the Administration will be left to deal with the debt ceiling, the continuing resolution (which expires at the end of March), and, likely, the spending sequester.

LEGISLATIVE PROCESS/OUTLOOK


  • Assuming the deal is finalized this afternoon, the Senate may vote on the agreement this afternoon/evening, or tomorrow.  Unanimous consent will be necessary to expedite a vote in either time frame, meaning that any single Senator can delay a vote if he/she so chooses.  There likely will not be clarity on this until after both caucuses meet this afternoon.
  • Assuming unanimous consent exists to vote on a deal in short order, the agreement will be offered as a substitute amendment to H.R. 8, a House revenue bill, which is necessary to ensure the Constitutional requirement that revenue legislation originates in the House is met.  It is unknown whether such a consent agreement will require a simple majority vote (51 votes) or a supermajority (60 votes).
  • Even assuming the bill passes the Senate, there still has not been an indication yet from Speaker Boehner as to how the House might handle this legislation.  It is likely that there will be a Republican conference meeting later today or tomorrow during which time this will be discussed further.
  • House options include taking up the legislation and passing it as is; taking it up, amending it further, and sending back to the Senate for further action; or, if they so choose, not taking up the bill at all (which is unlikely).

We will keep you posted on developments as events warrant in the coming hours.