Happy New Year! Well, almost. Today, in the still of the night (after the ball dropped) the Senate approved a bipartisan agreement that sets the stage to avoid the draconian impact of tax hikes and spending cuts known as the fiscal cliff. The vote was a dramatic and overwhelming endorsement of a limited plan that focused primarily on revenue, not on spending. It passed by a vote of 89 to 8.
Here is a summary of the fiscal cliff agreement approved by the Senate early Tuesday morning. The House could vote on the plan today, and this is not a slam dunk. Many house members, elected by wide margins on reducing government spending by constituents who believe in smaller government, are representing a position that every tax dollar raised should go to reducing government debt. That concept is not in this plan, so once again, House Speaker John Boehner has a tough sell to recalcitrant lawmakers.
• Families with incomes above $450,000 a year and individuals above $400,000 will see their tax rates permanently rise to a Clinton-era top rate of 39.6 percent from 35 percent. All income below those levels will be permanently taxed at the current Bush-era levels, although tax deductions and credits would start phasing out on incomes as low at $250,000 a year.
• Capital gains and dividends will be permanently taxed at 20 percent for those with income above the $450,000/$400,000 threshold. The tax rate will remain at 15 percent for everyone else.
• The estate tax will be pegged at 40 percent for individuals above the $400,000 threshold, with a $5 million exemption, and couple above $450,000 with a $10 million exemption. Those thresholds will be indexed to inflation, as a concession to Republicans and some Democrats in rural areas.
• The $100 billion in across the board cuts or “sequester” will be postponed for two months. Half of the 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 patched to avoid impacting middle-income Americans.
• A full package of temporary business tax breaks — benefiting everything from R&D and wind energy to race-car track owners — will be extended for another year, as will tax credits for low-income working families.
• A full-year’s extension of unemployment insurance for nearly 3 million Americans.
• Elimination of a two-percent payroll tax holiday.
• Scheduled cuts in Medicare reimbursement payments to doctors will be avoided for a year through alternative but unspecified savings.
• A nine-month extension of the farm bill.
• No decision was made on raising the debt ceiling.