WASHINGTON (CNN) — If a Senate deal to avert the fiscal cliff becomes law, all but a sliver of the U.S. population will avoid higher tax rates, some key issues will be put off for two months, and President Barack Obama will have ceded ground on a central promise of his re-election campaign.
The deal, which passed the Democratic-controlled Senate in an overwhelming 89-8 vote in the middle of the night, would maintain tax cuts for individuals earning less than $400,000 and couples earning less than $450,000. Technically, it would reinstate cuts that expired at midnight.
It would also mark the first time in two decades that tax rates jump for the wealthiest Americans.
The bill faces an uncertain future in the Republican-controlled House, which convenes at noon. Some GOP lawmakers, including Reps. Phil Gingrey of Georgia and and Tim Huelskamp of Kansas, told CNN Tuesday that they won’t support the bill.
“It’s taxing, and still taxing, small businessmen and women, and I don’t like that at all,” Gingrey said, referring to some small business owners who would be among those whose tax rates rise.
It’s the opposite argument of some Democrats who oppose the bill. Sen. Tom Harkin, D-Iowa, complained that the deal “makes tax benefits for high-income earners permanent, while tax benefits designed to help those of modest means and the middle class are only extended for five years.”
The bill extends certain tax breaks — such as the one for college tuition — for five years, while making new tax rates permanent.
But it goes squarely against something Obama has long vowed: That tax rates will go up for the top-earning 2% of Americans, including those with household income above $250,000.
“What I’m not going to do is to extend Bush tax cuts for the wealthiest 2% that we can’t afford and, according to economists, will have the least positive impact on our economy,” the president said at a news conference in November, after being asked by CNN why Americans should believe he would not “cave again this time” by allowing those Bush-era tax cuts to be extended.
When asked whether closing loopholes instead of raising rates would be satisfactory, the president responded, “when it comes to the top 2%, what I’m not going to do is to extend further a tax cut for folks who don’t need it, which would cost close to a trillion dollars. And it’s very difficult to see how you make up that trillion dollars, if we’re serious about deficit reduction, just by closing loopholes in deductions. You know, the math tends not to work.”
The deal passed by the Senate would cap itemized deductions for individuals making $250,000 and for married couples making $300,000.
Raising the threshold for higher tax rates to $400,000 shrinks the number of Americans affected. While nearly 2% of filers have adjusted gross incomes over $250,000, only 0.6% have incomes above $500,000, according to the Tax Policy Center.
Still, in a written statement early Tuesday, the president held on to the 98% figure he has so often touted.
The deal “protects 98% of Americans and 97% of small business owners from a middle class tax hike,” he said. “While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay.”
The president also acknowledged, “There’s more work to do to reduce our deficits, and I’m willing to do it. But tonight’s agreement ensures that, going forward, we will continue to reduce the deficit through a combination of new spending cuts and new revenues from the wealthiest Americans.”
It’s the reality of compromise: If something does pass, Democrats, Republicans and the White House will walk away with only part of what they want, and some things they don’t.
“Glad it’s over,” said Senate Majority Leader Harry Reid, D-Nevada, after the vote, just a couple of hours after the East Coast rang in the new year. “We’ll see if the Republicans in the House can become functional instead of dysfunctional.”
A statement from House leadership made no promises.
“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,” the statement said.
A vote could come as early as New Year’s Day. The House is scheduled to convene at noon.
Sen. John Hoeven, R-North Dakota, was hopeful the House will follow suit.
“The vote was 89 to 8. Bipartisan vote. 89 votes,” he said. “I think it sends a strong message and I think it will be approved by the House.”
What the package proposes:
Under the Senate package:
– Taxes would stay the same for most Americans. But they will increase for individuals making more than $400,000 and couples making more than $450,000. For them, it will go from the current 35% to the Clinton-era rate of 39.6%.
– Itemized deductions would be capped for those making $250,000 and for married couples making $300,000.
– Taxes on inherited estates will go up to 40% from 35%.
– Unemployment insurance would be extended for a year for 2 million people.
– The alternative minimum tax — a perennial issue — would be permanently adjusted for inflation.
– Child care, tuition and research and development tax credits would be renewed.
– The “Doc Fix” — reimbursements for doctors who take Medicare patients — will continue, but it won’t be paid for out of the Obama administration’s signature health care law.
– A spike in milk prices will be avoided. Agriculture Secretary Tom Vilsack said milk prices would have doubled to $7 a gallon because a separate agriculture bill had expired.
What’s not addressed
While the package provides some short-term certainty, it leaves a range of big issues unaddressed.
It doesn’t mention the debt ceiling, and temporarily puts off for two months the so-called sequester — a series of automatic cuts in federal spending that would have taken effect Wednesday. It would have reduced the budgets of most agencies and programs by 8% to 10%.
This means that, come late February, Congress will have to tackle both those thorny issues.
“We’re going to have to deal with the sequester, that’s true,” said Sen. Max Baucus, D-Montana, “but look, this is better than nothing.”
Reid said the agreement was a win for average Americans.
“I’ve said all along that our most important priority was to protect the middle class families,” he said. “This legislation does that.”
And maybe a bit more.
According to the U.S. Census Bureau, median household income in 2011 was $50,054, which is well below the tax cut threshold approved by the Senate.
Senate Minority Leader Mitch McConnell, R-Kentucky, praised the effort, but said it shouldn’t have taken so long to get an agreement.
“We don’t think taxes should be going up on anyone but we all knew that if we did nothing they would be going up on everyone today,” he said. “We weren’t going to let that happen.”
If the bill doesn’t pass:
There’s a lot at stake.
If the House doesn’t act and the Bush administration’s 2001 and 2003 tax cuts expire, broad tax increases will kick in, as will $110 billion in automatic cuts to domestic and military spending.
The nonpartisan Congressional Budget Office has predicted the combined effect could dampen economic growth by 0.5%, possibly tipping the U.S. economy back into a recession and driving unemployment from its current 7.7% back over 9%.
But if tax-averse House Republicans approve the bill Tuesday — when taxes have technically gone up — they can argue they’ve voted for a tax cut to bring rates back down, even after just a few hours. That could bring some more Republicans on board, one GOP source said.
But Gingrey, speaking Tuesday to CNN, said he does not believe his constituents will see it that way.
He’s concerned they will see it as “just more smoke and mirrors, and Congress pulls these stunts all the time,” Gingrey said. “Putting off the sequester for two months, kicking that can down the road yet again… this bill, as I see it so far, looks like it’s all about raising revenue, but very little, if anything, about cutting spending.”
The White House budget office noted in September that sequestration was designed during the 2011 standoff over raising the federal debt ceiling as “a mechanism to force Congress to act on further deficit reduction” — a kind of doomsday device that was never meant to be triggered. But Congress failed to substitute other cuts by the end of 2012, forcing the government to wield what the budget office called “a blunt and indiscriminate instrument.”
In its place, the Senate plan would use $12 billion in new tax revenue to replace half the expected deficit reduction from the sequester and leave another $12 billion in spending cuts, split half-and-half between defense and domestic programs.
Despite the progress, the White House cautioned that deficit reduction still requires more work.
“But tonight’s agreement ensures that, going forward, we will continue to reduce the deficit through a combination of new spending cuts and new revenues from the wealthiest Americans,” Obama said.
Conservative lobbyist Grover Norquist, whose Americans for Tax Reform group pushes candidates to sign a pledge never to raise taxes, said the plan “right now, as explained” would preserve most of the Bush tax cuts and wouldn’t violate his group’s pledge.
“Take the 84% of your winnings off the table,” Norquist told CNN. “We spent 12 years getting the Democrats to cede those tax cuts to the American people. Take them off the table. Then we go back and argue about making the tax cuts permanent for everyone.”
But Robert Reich, who served as labor secretary in the Clinton administration, said the $450,000 threshold “means the lion’s share of the burden of deficit reduction falls on the middle class, either in terms of higher taxes down the road or fewer government services.” In addition, he said, the plan does nothing to raise the federal debt ceiling just as the federal government bumps up against its borrowing limit.
And that, Arizona GOP Sen. John McCain told CNN, is likely to be “a whole new field of battle.”
“We just added 2.1 trillion in the last increase in the debt ceiling, and spending continues to go up,” McCain said. “I think there’s going to be a pretty big showdown the next time around when we go to the debt limit.”