Fixing the Debt: Update on U.S. Fiscal Cliff Crisis (6th Edition) - December 28, 2012

RECENT DEVELOPMENTS


  • The President and Congressional leaders met Friday at the White House at 3:00 pm in an attempt to strike a last-minute deal. 
  • Today’s meeting, which lasted about an hour, was attended by the President, Vice President, Treasury Secretary Geithner, Speaker Boehner, Senate Majority Leader Reid, Senate Minority Leader McConnell, and House Minority Leader Pelosi. In the meeting, the President asked Senate Leaders Reid and McConnell, in short order, to agree to a bipartisan deal that can pass the Senate. 
  • After the meeting, Leaders Reid and McConnell continued the discussion in the Roosevelt Room.  A short time later, both spoke on the Senate floor indicating that the White House meeting was constructive and that they would spend the next 24 hours or so attempting to negotiate a bipartisan deal to avert the fiscal cliff.
  • Leader Reid also announced that the Senate will be out of session on Saturday, December 29, and back in session on Sunday afternoon, December 30, with a nomination vote at around 2:00 pm.  Following that vote, the Leaders will likely report to their caucuses on any progress they have made in reaching an agreement.  The next 24 hours will be critical, with negotiations beginning tonight.
  • If an agreement can be reached by Reid and McConnell, expect it to be a “mini-deal” that includes an extension (or permanence) of the Bush tax cuts for some increased income threshold (e.g., income $400,000 or $500,000), along with other measures including an extension of unemployment insurance, preferential rates for long term capital gains and qualified dividends, and estate tax relief.  It remains to be seen what the precise contours of these provisions would be and if other measures might be added (such as a delay of the spending sequester, tax “extenders,” and Medicare SGR fix).
  • Following the Reid/McConnell floor statements, the President also held a press conference, in which he reiterated that he has asked Reid and McConnell to construct a deal that can pass.  The President also stated that in the absence of such a deal he has asked Majority Leader Reid to bring legislation to the floor for a vote that would (1) extend the current tax rates for income below $200,000/$250,000; (2) extend unemployment insurance for some duration; and (3) lay the groundwork for “deficit reduction and economic growth” legislation in 2013 (though it is unclear what specifically that means).  The President said such a bill has consensus support and should be voted on by the House and Senate on an up-or-down basis.
  • Leader Reid also released a statement that he intends to bring such a bill to the floor for a vote on Monday, but in the meantime welcomes the good faith proposals from Leader McConnell on how the terms of that bill should be altered.
  • Speaker Boehner reportedly has said that if a deal by the Senate is reached he will consider it.  While this is short of a guarantee that he will allow a vote, should Reid/McConnell reach a deal it will be a very positive step.  The House will return to session Sunday evening in anticipation of a possible Senate deal.

POTENTIAL OFFERS 

If a “mini-deal” agreement were to emerge in the Senate between Reid and McConnell, it could contain the following elements:

    • Make permanent (or extend) all the Bush tax cuts for income below some threshold level (e.g. $400,000 or $500,000)
    • Make permanent (or extend) the existing maximum rate and personal exemption levels of the estate tax
    • Make permanent (or extend) the 15 percent rate on long term capital gains and qualified dividends for those with income below ($500,000), with a maximum rate of 20 percent for those with income above that threshold
    • AMT patch for at least 2012, and possibly beyond
    • Reinstate PEP/Pease limitations for those with income above ($500,000)
    • Extend unemployment insurance for some duration
    • It is unclear whether a deal would include a delay of the spending sequester, but it is unlikely to include an increase in the debt ceiling, which would be left to be dealt with early next year.
    • It is possible such a deal could include tax “extenders” and SGR (Medicare doc fix).

CONCLUSION


  • Friday’s White House meeting and the statements following it are the best sign that momentum for a deal is building.  The next 24 hours will be critical, however, as both sides will have to make significant concessions in order to arrive at a deal. 
  • Any potential mini-deal would now most likely have to include a concession from the White House on income thresholds from its preferred approach of $200,000/$250,000, and probably on its demand that the debt ceiling be raised now.  If so conceded, many believe a deal could garner support from Democrats and Republicans. 
  • The issues left untouched in any mini-deal would then be up for consideration at the next government showdown in a month or two when the country will need to raise the debt limit. 


The next 24 hours will be critical—we will keep you updated as it develops.