Washington Insight - Special Edition: Congress Steps Away From Fiscal Cliff

by King & Spalding

For months in Washington, and beyond, attention has been focused on the "fiscal cliff" -- the combination of the expiration of the Bush tax cuts and the looming budget cuts referred to as "sequestration." Negotiations led by the President, House Speaker John Boehner and the Senate leadership to address the "cliff" went down to the wire and were ultimately addressed by Congress on January 1, 2013, when the Senate passed H.R. 8, the American Taxpayer Relief Act, by a vote of 89-8 early that morning, and the House passed the bill by a vote of 257-167 later that evening. In so doing, Congress addressed the tax cuts and sequestration, as well as a number of other critical items, such as the "doc fix," tax extenders, the farm bill, the alternative minimum tax, and the estate tax. One particular "winner" was the energy industry, which saw an extension of the wind production tax credit (PTC), a retroactive extension of tax credits for biofuels and alternative fuels, as well as a modification and extension of the PTC for renewable energy to allow projects to claim the credit at the outset of construction, as opposed to when power is actually delivered to the electric grid.

However, Congress was unable to agree on ways to resolve other pressing issues such as increasing the debt ceiling, aid to victims of Hurricane Sandy, delaying or repealing the medical device tax, or extending the payroll tax cut. And even though it succeeded in addressing the sequestration, it did so only temporarily; it looms again and is scheduled to occur on March 27, 2013, the same day that funding for the government's operation in 2013 expires. It's clear to see that another crisis is not too far off. To be sure, when the 113th Congress begins today, it has its work cut out for it.

The 113th Congress will confront three of these issues in what some are calling "mini-cliffs." First, the debt ceiling: Treasury Secretary Geithner notified Congress a few days prior that on December 31, 2012, the United States would reach its $16.4 trillion debt ceiling and that he had undertaken a "debt issuance suspension period," using "extraordinary" borrowing measures to make sure the government avoids exceeding its debt limit. Secretary Geithner noted that this "debt issuance suspension period" will last until February 28, 2013. Second and third, the current continuing resolution, which funds the operations of the federal government, expires on March 27, 2013 -- the same day to which Congress postponed sequestration.

Once Congress addresses the deadlines and issues associated with these short term measures, which also offer opportunities to deal with other unresolved issues, such as the medical device tax, we still expect to see a longer term attempt at broad tax reform.

Overview of H.R. 8, the American Taxpayer Relief Act:

Sequestration Postponed:
• Postpones sequestration of FY 2013 spending scheduled to begin January 1, 2013, by two months, to March 27, 2013, when the current six month continuing resolution for FY 2013 expires. Total automatic cut for FY 2013 would be reduced by $24 billion to $85 billion required from discretionary and mandatory spending. Requires the Obama Administration to release its sequester report and order cuts on March 1.
• To pay for the $24 billion reduction in the amount required to sequester, the bill lowers the caps on discretionary spending for FY 2013 and FY 2014 and raises $12 billion in revenue by allowing individuals with traditional tax-deferred IRAs to switch to Roth IRAs at any time, rather than only in limited circumstances.
• Extends unemployment benefits for an additional year, through December 31, 2013.

• The measure permanently extends Bush-era income tax brackets of 10%, 25%, 28%, and 33%, as well as the current 35% -- for taxable income up to $400,000 for individuals and $450,000 for couples. Above these levels, tax rates rise from 35% to 39.6%. Permanently extends reduced rates on capital gains and dividends on income up to the $400,000 for individuals/$450,000 for couples, but raises rates from 15% to 20% for income above these levels.
• Permanently extends estate tax exemption amount at current levels, but increases maximum rate from 35% to 40%.
• Includes permanent "patch" for the alternative minimum tax, setting exemption amounts at $50,600 for individuals and $78,750 for couples filing jointly.
• Extends a number of expired credits and deductions for individuals and businesses. For individuals, the bill includes extensions of the expanded child tax credit, expanded income tax credit and several education-related credits and deductions. Extends the over 50 credits and deductions that Congress last extended in the 2010 tax law, through 2012 and 2013, including the deduction for state and local sales taxes in lieu of state income taxes, "above the line" deductions for qualified tuition expenses and for teachers for up to $250 in classroom expenses, deduction for private mortgage insurance premiums, bonus depreciation, and the research and experimentation credit.
• Does not extend the temporary 2% Social Security payroll tax that has been in effect for two years.

Energy Taxes:
• Extends for one year the wind PTC.
• Modifies and extends renewable energy PTC requirements to allow projects to be eligible for the credit at the start of construction, as opposed to when power is delivered to the electric grid.
• Extends credits for energy efficient new homes and energy efficient appliances and extends eligibility for non-business energy property tax credits for exterior windows, doors and skylights.
• Extends credit for alternative fuel vehicle refueling property.
• Extends credit for two-wheeled or three-wheeled plug-in electric vehicles.
• Extends credit for production of cellulosic biofuel and adds algae as a qualified feedstock.
• Extends credits for biodiesel and renewable diesel fuel.

Farm Bill:
• Partially extends current farm law nine months, through Fiscal Year 2013, but does not include drought disaster assistance or funding of energy provisions and other expired programs that were in the 2008 law.

Health Provisions:
• Blocks 27% cut in reimbursements for Medicare physicians, maintaining current reimbursement rates through Dec. 31, 2013.
• Extends a number of other reimbursement rates and health programs, including the outpatient therapy exemption, qualified individual and transitional programs under Medicaid, Medicare work geographic adjustment, diabetes prevention and research for American Indians and Alaskan Natives, Medicare-dependent and low-volume hospital programs, and Medicare Advantage Plans for special needs individuals.
• To offset these program costs, the agreement modifies Medicare payment rate adjustments for acute inpatient treatments, extends previously enacted lower Medicaid disproportionate share hospital (DSH) payments, changes the bundled payment for end-stage renal disease services, reduces reimbursement for therapy procedures performed on the same day, and reduces medical imaging payments.
• Repeals the Community Living Assistance Services and Supports (CLASS) program enacted as part of the 2010 Affordable Care Act. Although the Department of Health and Human Services suspended implementation of the long-term care insurance program in October 2011, Republicans pushed for full repeal, and the final bill replaces CLASS with a commission on long-term care.

On the Horizon

With only 28 voting days scheduled before the new sequester deadline hits and the 2013 funding resolution expires, there is not much time to consider additional items in the early days of the 113th Congress. This is especially true if the various congressional committees take an active part in the crafting of legislation. The most likely candidates for early action in the year are the bills that remained as unfinished business at the end of the lame duck--most notably Hurricane Sandy relief and other issues such as cybersecurity.

Other issues that may see committee consideration early in the year could be longer term agenda items such as immigration reform and a revamping of tax policy. Additionally, the annual work on the budget and appropriations will begin with the submission of the President's FY 2014 budget sometime in late February. The Appropriations Committee will also need to wrap up the FY 2013 appropriations bills while beginning work on the FY 2014 appropriations bills.

In later editions of Washington Insight we will explore in greater depth these and other issues that will be the focus of congressional attention as the year progresses.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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