This post was also written by Robert Helland and Gunjan Talati.
Congress and the Obama Administration have driven the economy from the “Fiscal Cliff,” with the last-minute tax and spending deal that is expected to be signed into law. But it’s a Pyrrhic victory: the battle over taxes and spending will go on (and on) into 2013, with decisions needed to be made again on raising the debt limit and how to spend the federal dollar.
Here are highlights as to what was agreed to:
- Income tax rates will rise, for families with income of more than $450,000 and individuals making more than $400,000. Those with taxable income in excess of these thresholds will now pay tax on the excess at 39.6%, instead of 35%. President Obama had wanted rates to rise for those making more than $250,000 ($200,000 for individuals) while House Speaker Boehner (R-OH-8) proposed rates to rise for those all earning more than $1 million.
- Capital gains tax rates will rise from 15% to 20%, also for families with income of more than $450,000 and individuals making more than $400,000.
- The estate tax rate will be 40% for those at the $450,000/$400,000 threshold, with a $5 million exemption that is indexed to inflation.
- The $109 billion in sequestration cuts expected to take effect January 1 will now be delayed two months.
- The Alternative Minimum Tax will be permanently adjusted to avoid raising taxes on middle class taxpayers.
- All “tax extender” measures – from those promoting alternative energy development to those promoting research and development efforts by businesses – are extended for one year.
- Medicare rates will be adjusted so that a 27% cut in physician reimbursement would not occur (the so-called Medicare “doc fix”).
- Benefits for the long-term unemployed will be continued.
- The 2% decrease in the payroll tax will expire.
But the delay in sequestration is just that. In two months, Congress and the President will have to again decide whether to allow the $1.2 trillion in cuts to domestic and defense spending to begin. And the pressure to cut additional funds from the budget – or raise additional revenue – will intensify, given that come the end of February, the federal government will have to again raise the federal debt ceiling. Thus, it is still prudent for contractors to continue making preparations for sequestration.
So this is a deal that avoids some of the pain, but leaves a lot of it to be decided by the next Congress, which will be sworn in January 3 at noon.
With many new members arriving, the 113th Congress will likely have different ideas on the debt limit and budget issues, and will no doubt take different steps to address them.
All of which will make 2013 as eventful as 2012.