After a raucous New Year’s weekend, our beloved Congress finally managed to cobble together a ramshackle deal that left nearly everybody unhappy. At 10:55 p.m. last night, the House of Representatives put the final stamp of approval on the Senate passed fiscal cliff bill by 257-167 vote.
The president subsequently signed it into law and we all woke up this morning wondering what happened. Here’s a quick summary of what’s in the bill (courtesy of the Wall Street Journal) followed by my major takeaways from last night and this whole mess:
- Individuals making over $400,000 a year ($450,000 for couples) will see their tax rates rise to a Clinton-era top rate of 39.6% from 35%. All income below those levels will be taxed at the current Bush-era levels, although tax deductions and credits would start phasing out on incomes starting at $250,000 a year.
- Capital gains and dividends will be taxed at 20% for those with income above the $450,000/$400,000 threshold. The tax rate will remain at 15% for everyone else.
- The estate tax will be 40% for those at the $450,000/$400,000 threshold, with a $5 million exemption. That threshold will be indexed to inflation, as a concession to Republicans and some Democrats in rural areas.
- The $1.2 trillion in across-the-board cuts (known as the “sequester”) will be postponed for two months. Half of the pro-rated delay will be offset by discretionary cuts, split between defense and non-defense. The other half will be offset by new revenue.
- The Alternative Minimum Tax will be permanently fixed to avoid impacting middle-income Americans.
- A collection of temporary business tax breaks will be extended for another year, as will tax credits for low-income working families.
- Unemployment insurance for nearly 3 million Americans was extended a full year.
- The 2% payroll tax holiday started in 2010 will come to an end, raising payroll taxes to 6.2% from 4.2%.
- Scheduled cuts in Medicare reimbursement payments to doctors will be postponed for a year through alternative but unspecified savings.
- A nine-month extension of the farm bill (so no dairy cliff just yet).
- No decision was made on raising the debt ceiling.
There are a number of other measures in the legislation, such as a $250 tax deduction for teachers buying supplies for their classrooms and a rum tax (Jack Sparrow said to be inconsolable), but the above list captures most of the big ticket issues.
But last night’s deal didn’t just avert the fiscal cliff; it also taught us a great many things about this Congress. Here are my big takeaways from the first great fiscal cliff fiasco of 2012-2013.
1. Grover Norquist’s grip is breaking, and everything is topsy turvy
Grover Norquist, the avowed tax crusader behind the infamous “NO TAXES EVER, I SWEAR TO GOD” pledge, has seemingly held court over congressional Republicans for most of the 111th and 112th Congress (many would argue longer). The fiscal cliff negotiations saw well over 100 Republicans break with Norquist’s tax pledge, voting to push through a bill that saw taxes on the super-wealthy go up by 4%.
In an effort to save face, Norquist claimed that because the Bush tax cuts had technically expired December 31 at midnight, meaning that Republicans were voting to re-cut taxes for most Americans rather than voting to allow tax rates to go up.
Unfortunately for Grover the cop-out was just that - he had previously said that anything less than a full extension of the Bush tax cuts would be a violation of the pledge. Grover’s power over D.C. Republicans may be receding but we will have to wait for 2014 to see just how much clout Grover lost last night.
2. House Republicans are at war with themselves
Outgoing Rep. Steve LaTourette (R-Ohio) summed it up nicely on the morning after the House fiscal cliff vote. Republicans “got whooped,” he said.
Unfortunately for LaTourette and the rest of the House GOP, the whooping was very much one of their own making. Conservative Republicans threw a fit when they saw that the bill agreed to and passed by the Senate failed to include any meaningful spending cuts. They only had themselves to blame.
Boehner walked away from several opportunities to put cuts on the table in his negotiations with the White House, saying that he’d let the White House and the Senate hash out a deal and he’d simply vote on it. Well, that gamble flopped as he was forced to accept a Senate deal that had very little of what his caucus had been demanding.
The rift showed early in the day as House Majority Leader Eric Cantor (R-Va.) challenged Boehner behind closed doors by openly opposing the deal. While Cantor’s spokesperson downplayed the statement, Cantor ended up voting against the bill. Cantor was joined by Rep. Ryan McCarthy (R-Calif.), the No. 3 Republican in the House in opposing the Senate bill.
While Speakers rarely participate in a roll call vote Boehner decided to make a statement, casting a vote in support of the bill. Boehner was joined by Rep. Paul Ryan (R-Wisc.), who also supported the bill, albeit silently.
The bill passed with only 85 Republicans votes in favor, barely half the number of Democrats who supported the bill. The Republican reaction to the bill’s passage has been caustic with many out-going conservatives levying their guns against Boehner and Senate Republicans. The rift will only get bigger when Boehner stands for re-election as speaker on Thursday when the new Congress is sworn in. Even if he manages to retain his speakership, the discord in his caucus is unlikely to subside anytime soon.
3. Democrats snuck one past the goalpost
With all the media coverage of Republicans screaming over the lack of meaningful spending cuts for the last two years, it may surprise many that there weren’t any real spending cuts in the fiscal cliff package signed by the president late last night. That’s primarily due to the Republican House’s failure to sit for meaningful negotiations and an inability to outline real spending cuts.
Democrats, who wanted to let the Bush tax cuts for wealthy Americans laps without any associated spending cuts, got what they wanted last night, at least for now. While it’s difficult to say that anybody “won” the fiscal cliff mess, the Democrats got away with political murder, sneaking revenue increases with no attached spending cuts past a usually vigilant Republican majority in the House.
This sets up future confrontations where Democrats hold much greater leverage. Not only will Democrats have more power in the next Congress, but they will have already gotten most of their campaigned-on tax increases without sacrificing entitlements or any other spending. This puts the Republicans in an extremely weak position over any future political fights as much of the GOP’s leverage vanished last night.
4. It’s going to get worse before it gets better
Don’t let last night’s “success” fool you. This fight is far from over and the next round is going to be much uglier. Two huge issues remained unaddressed last night: the sequester and the debt ceiling.
The sequester, a mandatory $1.2 trillion cut in spending over 10 years, was delayed for two months to give Congress time to figure out how to deal with it. The debt ceiling, technically already hit, will come calling again around the same time, leading to a likely repeat of last summer’s debacle that led to the US losing its AAA credit rating.
Senate Democrats agreed to the fiscal cliff deal under the understanding that there would be no negotiation over the debt limit – that raising the limit would receive a straight up/down vote and be passed with no fighting. While Senate Republicans may have agreed to that, there is no way that the House GOP will honor such a commitment.
The debt ceiling fight, coupled with the wrangling over how to implement or re-define the sequester, will likely lead to another government shutdown showdown. This time, Republicans hold even less leverage than before but are likely to be more steamed than ever thanks to last night’s deal. Their inability to negotiate will once again result in last minute deal-making sure to leave everyone unhappy yet again.
All eyes will be on the president to see if and how he leads the discussion going into the showdown. Obama punted to Biden for fiscal cliff negotiations but he won’t be able to do that again. On the debt ceiling he will be forced to either bring Republicans to the table or take the constitutional option, invoking the Fourteenth Amendment to invalidate the debt ceiling as a legal concept wholesale. Experience tells us that depending on Obama’s backbone is a poor bet, so Democrats are likely to already be wringing their hands over trying to figure out how to get Republicans to not use the United States’ credit rating as a hostage for spending cut negotiations.
Regardless of the approach, get ready to hear plenty more about the next self-made crisis to hit Congress in late February/early March.