Fiscal Cliff Averted

Posted on January 1, 2013

Early this morning, the Senate rang in the New Year by approving legislation to avert the economic impacts of the fiscal cliff. The bipartisan agreement makes changes to tax policy by allowing for the first income tax rate increase in nearly two decades and also delays the sequester by offering $24 billion in other spending reductions. The House is scheduled to take up the legislation at noon today. Conservative opposition in the House has thwarted earlier fiscal cliff proposals and Republicans will likely need the support of Democrats to clear the legislation. Democratic leaders said late Monday they were still reviewing the bill, but with the White House backing it, Democrats seemed likely to favor it.

The deal agreed to in the Senate would permanently extend the 2001 and 2003 tax rates for ordinary income, capital gains, and dividends for individuals with annual incomes below $400,000 and couples with incomes below $450,000. It would preserve the current estate tax exemption and permanently prevent the alternative minimum tax (AMT) from imposing higher taxes on middle-income Americans. The agreement also retroactively renews a package of one- or two-year reauthorizations of tax extenders, including the R&D tax credit.

As for spending, the measure would delay the sequester for two months — until the beginning of March — and cover the $24 billion cost with a combination of new revenue and alternative spending cuts over a 10-year period. The plan calls for reducing the FY2013 and FY2014 discretionary spending caps determined in the 2011 Budget Control Act (PL 112-25) by $12 billion. The spending cuts would be evenly divided between defense and non-defense spending. Another $12 billion would be new revenue generated by making it easier for owners of some tax-deferred retirement plans to switch to Roth IRAs. The two-month sequester delay is designed to give Congress more time to figure out a substitute for across-the-board cuts, which would slice $55 billion from defense, about $39 billion from domestic discretionary spending, and $16 billion from mandatory spending programs during the remaining nine months of FY2013.

While it is good that Congress is finally taking action on tax issues and averting the worse parts of the sequester, they have set themselves up for another fiscal fight in the early months of the 113^th Congress. The nation will bump up against another debt ceiling limit in February and Congress will need to take legislative action at that time to increase the limit. This will certainly be another fight on reducing federal spending, and will coincide with the new deadline to prevent sequestration that the Senate approved early this morning. Additionally, Congress has yet to finalize FY2013 appropriations and it seems clear that they will approve a year-long continuing resolution (CR) when the current CR expires at the end of March. The big question yet to be answered is how spending cuts will be determined if the across-the-board cuts are to be avoided by the new end of February deadline.

Fiscal Cliff Update

Posted on December 27, 2012

The Senate reconvenes today and will make a last attempt to legislate before large automatic tax increases and spending cuts take effect on January 1st. The House is scheduled to meet only in a pro forma session after Republican leaders said the Senate would need to act first to produce a legislative solution after their own “Plan B” effort fell apart last week. House GOP leaders have promised to give members 48-hours notice before calling them back to the Capitol. As of this morning, that notice has not yet been given and the “fiscal cliff” countdown clock continues to wind down.

Most congressional leaders have signaled a strong desire to pass some sort of fiscal package before New Year’s Day. However, what sort of legislation could move quickly through the Republican House and Democratic Senate remains uncertain. President Obama is pushing for a less ambitious package that extends tax cuts on household income below $250,000, continues unemployment benefits, and delays the across-the-board spending reductions or sequestration. There is still time to get this done if the Senate can act quickly.

Another wrinkle appeared yesterday when Treasury Secretary Timothy Geithner sent an open letter to Congress noting that the national debt limit would be hit on December 31^st. While the letter indicated that the Treasury could pursue “extraordinary measures” to postpone the impact of reaching the limit, it also cited the looming fiscal cliff for some uncertainty, saying “Given the significant uncertainty that now exists with regard to unresolved tax and spending policies for 2013, it is not possible to predict the effective duration of these measures.”

Finally, the White House issued guidance last week to federal agencies on how to handle sequestration if Congress fails to act by the end-of-year deadline. This is significant as it signaled a decision on the White House’s part to publicly prepare for sequestration, which they have avoided doing in the past. Of note in the guidance is that the implementation of sequestration would not result in a government shutdown, but rather a gradual reduction in spending that would begin to be felt in the early months of 2013 if a solution is not identified shortly after the New Year.

Everything is still very uncertain at this point. We will continue to monitor the situation closely and report as new information becomes available.

Possible Deal to Avoid the “Fiscal Cliff”

Posted on December 18, 2012

A deal appears to be in the making to avoid the “fiscal cliff.” Late yesterday, President Obama made a counteroffer back to House Speaker Boehner (R-OH) that would raise the top tax rates on income above $400,000, $400 billion in health care cuts, and $200 billion in discretionary cuts. The White House proposal also includes a debt limit increase for two years, a permanent extension of expired tax extenders, and a turning off “except in select areas” of the sequester. Additionally, it proposes a modified version of the “chained CPI,” which would calculate the Consumer Price Index in a way that would save the government money on entitlements, such as Social Security, but would include provisions to protect “vulnerable” populations.

According to news reports, the plan would eliminate at least most of the sequester. Specifically, it would void the automatic across-the-board spending cuts but would be replaced with other spending cuts. It is unclear at this point as to which areas will take the cuts or whether those cuts will be evenly applied to defense and non-defense discretionary programs. We had hoped that the cuts made back in August 2011 as part of the Budget Control Act would be counted toward any new debt deal but it now appears that there will be additional discretionary cuts without any credit toward previous cuts. It is also unclear as to what cuts are proposed as part of the $400 billion in health care cuts.

The current offer would provide for spending on infrastructure and extending unemployment insurance but apparently would not extend the temporary payroll tax cut. Additionally, the debt ceiling would be extended for two years, twice as long as Boehner is reported to have proposed in an offer to Obama last week. Finally, the current proposal would extend provisions that prevent the alternative minimum tax (AMT) from hitting millions more taxpayers, as well as prevent cuts in federal payments to doctors who treat Medicare patients – the so-called “Doc Fix.”

The $2.4 trillion proposal, when added to the existing $1.1 trillion in spending cuts from the 2011 Budget Control Act and war savings, would produce $4 trillion in deficit reduction.

There are just two weeks left to solidify a deal before the end-of-year deadline. Legislation could be drafted, scored, and cleared in as little as four days if an agreement is struck. But with two holidays and two weekends between now and the end of the year, that would make December 27^th the outside deadline for an agreement. It’s even still possible to get the legislation passed before Christmas if an agreement were reached and members agree to work through the coming weekend.

If the end-of-year deadline is missed, the real deadline for passing the legislation would be just before noon on January 3^rd, shortly before the 113th Congress convenes. Or if no accord is reached, Congress could simply pass a bill to delay the tax increases and spending cuts into next year.

We will continue to monitor closely and provide an analysis of the specific spending cuts and tax changes as they become more apparent. While this current action is seen as a positive step toward reaching a debt deal, many things can still change the final outcome.

FISCAL CLIFF COUNTDOWN: 15 DAYS

Posted on December 17, 2012

As we move into the last two weeks of the calendar year – and come ever closer to the edge of the “fiscal cliff” – House Speaker Boehner (R-OH) has offered to allow a tax increase on millionaires, which is a significant shift toward President Obama’s position on raising tax rates for the wealthy. But is comes with a caveat: Boehner would only agree to this if Democrats agree to significant spending cuts, including to entitlement programs. In exchange for higher tax rates for annual income of more than $1 million, the GOP offer would raise the eligibility age for Medicare benefits from the current 65 to 67 and require $1 trillion in new spending cuts.

The GOP appears to be moving closer to President Obama’s position on tax rates, but the Speaker’s offer is still nowhere close to what the President or Democratic leaders on Capitol Hill can ultimately accept. The two sides also remain far apart on the extent and source of cuts to entitlement programs. No new talks have yet been announced for this week, but both sides say the lines of communication between the Administration and Capitol Hill Republicans remain open.

17 Days to “Fiscal Cliff”

Posted on December 14, 2012

President Obama and House Speaker Boehner (R-OH) met for almost an hour yesterday at the White House to discuss issues related to the fiscal cliff, but there were no obvious signs of progress. Instead, both sides appear to be holding fast to their partisan views on taxes and spending. This is the second face-to-face meeting they have held in the past week on a deal to extend expiring tax cuts and replace scheduled across-the-board spending cuts (sequestration). Republicans continue to demand additional spending cuts and democrats continue to show confidence that taxes will go up on high-income earners without having to give in on entitlement reform. Democrats said Thursday they have no plans to discuss concessions on spending, at least until Republicans accept a tax rate increase on upper-income earners. Many had expected a deal to come together by this point in the lame duck session. It now appears that Congress will remain in session right up to Christmas and may even be working during the week between Christmas and New Years.