Hard-Fought Bill Averts Broad Tax Hikes, Spending Cuts, but Puts Off Major Issues
By JANET HOOK, COREY BOLES and SIOBHAN HUGHES
Congress broke a rancorous stalemate Tuesday to pass legislation designed to avert the so-called fiscal cliff. But the compromise bill, which blocked most impending tax increases and postponed spending cuts largely by raising taxes on upper-income Americans, left a host of issues unresolved and guaranteed continued budget clashes between the parties.The bill represented the largest tax increase in the past two decades and was passed over opposition from conservative Republicans in the House who objected to the fact that it contained no long-term spending cuts of any significance.
Both the U.S. Senate and House of Representatives approved a bipartisan deal to block most impending tax increases and postpone spending cuts. The WSJ's Mark Cranfield explains what the deal means for the U.S. deficit.
The U.S. Congressional compromise illustrates difficulties modern democracies face in producing fiscal-policy solutions, especially when central banks are keeping monetary policy so easy. Dow Jones' s David Cottle looks at the problem. Photo: Getty Images
President Barack Obama appeared in the White House press briefing room minutes after the House passed the bill. With Vice President Joe Biden standing behind his right shoulder, he said: "Thanks to the votes of Democrats and Republicans in Congress I will sign a law that raises taxes on the wealthiest 2% of Americans while preventing a middle-class tax hike that could have sent the economy back into recession and obviously had a severe impact on families all across America." Mr. Obama said he would like to take additional steps to reduce the nation's deficit.
Once the president signs the bill, it will end a tortured drive by Congress to avert the fiscal cliff, the deadline for which was technically breached on Jan. 1.
The far-reaching agreement will have lasting implications for the tax code, future budget battles and the balance of power in Washington. It raises income-tax rates for the first time in almost two decades and fulfills Mr. Obama's signature campaign promise to prevent rates from rising on the middle class. Not since 1991 has a Republican in Congress supported such a move—a challenge to its brand as the antitax party.
In policy terms, it permanently codifies most of the tax rates that were set only temporarily in the Bush era. After years of failed efforts, the bill permanently keeps the middle class from being hit by the alternative minimum tax, a 1960s edifice intended only for America's wealthiest.
At the same time, the bill defers some of America's toughest spending problems—in particular the ballooning cost of health care—and it doesn't come close to the kind of $4 trillion deficit-reduction deal the country's leaders had hoped to negotiate. By some estimates, it would cut the deficit by $600 billion over 10 years.
President Barack Obama said he would sign the bill sent to him by Congress to avert the U.S. fiscal cliff. Watch Obama's full statement, in which he praises the late-night deal. Photo: Getty Images.
The compromise dodges one cliff, but it sends Congress barreling toward another. In two months, the delayed $110 billion in spending cuts will again kick in. At the same time, the U.S. will face the need to increase its borrowing limit, a change that can only be made by Congress. That sets up another rancorous fight, one with potentially more damaging consequences. Republicans want to use the debt ceiling to extract spending cuts. Mr. Obama has said he won't negotiate.
The failure to grapple with the biggest budget questions disappointed business leaders who had hoped for a comprehensive budget agreement that could tackle the deficit and diminish what for some has been a debilitating policy uncertainty.
REUTERS
Speaker of the House John Boehner, right, walks with House Majority Leader Rep. Eric Cantor to a meeting with House Republicans on the fiscal cliff budget deal on Capitol Hill in Washington on Jan. 1.
It also became a last-minute vehicle for all manner of year-end miscellany. It included a stopgap extension of farm programs that averts a spike in milk prices, and it blocked a congressional pay raise that could have provoked the wrath of voters who view Congress with disdain for its chronic brinkmanship and failure to solve major problems.
The protracted debate over the fiscal cliff was a classic example of what has inspired the public's ire. Both parties had for months said they didn't want New Year's 2013 to hit without action to block the across-the-board tax rate increases and $110 billion in defense and domestic-program spending cuts collectively known as the fiscal cliff.
Fiscal Cliff
- Payroll-Tax Increase Set to Hit Most Households
- Text of the Senate Bill
- Summary of tax provisions in Senate bill
- Details of Tax Law Changes Spelled Out
- Deal Leaves Lawmakers With More to Do
- Deal's Likely Impact: More Slow Growth
- CEOs' Deficit Push Falters in Political Echo Chamber
- Capital Journal: Why Reaching Deals Is Hard
- Obama Appearance Ruffled Cliff Talks
- Lessons From 2011
- History of Tax Overhauls
- Live: Fiscal Cliff Stream
Related: Everything You Need to Know About the Fiscal Cliff
Last August, President Obama and Congress put the U.S. economy on course to go over a "fiscal cliff." WSJ's David Wessel tells you everything you need to know about the "cliff" but were afraid to ask.
At the heart of the deal are some of the biggest tax changes in years, including an increase in tax rates for couples with incomes over $450,000, to 39.6%. For those same households, capital-gains and dividend taxes would increase to 20%, from 15%. Estate taxes would increase from 35% to 40%.
More than three-quarters of American households would see a tax increase from their 2012 tax levels, according to an analysis by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute. For households earning between $500,000 and $1 million, the additional tax owed would be about $15,000. For households with incomes over $1 million, it would average about $170,000.
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Associated Press
President Barack Obama smiled as he arrives with Vice President Joe Biden to make a statement regarding the passage of the fiscal cliff bill Tuesday.
![[image]](http://si.wsj.net/public/resources/images/OB-VO839_CLIFFP_D_20121205171727.jpg)
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Senate Democratic leaders made clear that, if the House amended the bill, they would not consider the bill. Senate Majority Whip Dick Durbin (D., Ill.) said he was stunned by Mr. Boehner's initial reluctance to put the compromise to a vote. It was supported by nearly all Senate Republicans, including some of the most conservative members, such as Sens. Tom Coburn of Oklahoma and Pat Toomey of Pennsylvania.
"That's just madness,'' said Mr. Durbin. "We had a strong vote in the Senate. How much stronger can we make it?''
Mr. Boehner warned his colleagues that making changes risked killing the bill and exposing the GOP to blame for tax increases, spending cuts and possible turmoil in the economy. After canvassing members, Republican leaders decided there wasn't enough support to revise the bill and prolong the battle.
House Democrats supported the bill in significant numbers after a closed-door session with Mr. Biden, who came to the Capitol twice in 24 hours to sell the package. Mr. Biden's major mission was to calm liberals who groused that Mr. Obama gave too much ground.
Rep. Henry Waxman (D., Calif.) said earlier in the day that "the president gave up a lot—more than I would have liked—but I can understand that we're dealing with the product as it is, and I'll probably vote for it."
Many House Democrats expressed the same anguish Senators had Monday: Although most had significant reservations about the compromise, they weighed them against the potentially calamitous results of allowing the tax increases and spending cuts to remain in effect, especially with markets reopening Wednesday.
It was, said Rep. Gerry Connolly (D., Va.), a "hold-your-nose vote."
—Peter Nicholas contributed to this article. Corrections & Amplifications
Republicans wanted automatic spending cuts of $24 billion, known as the sequester, to be replaced with cuts in other areas and not simply be canceled. An earlier version of this article incorrectly said $24 million.
Write to Corey Boles at corey.boles@dowjones.com, Janet Hook at janet.hook@wsj.com and Siobhan Hughes at siobhan.hughes@dowjones.com
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