TOPICS > Politics

How Congress Passed a Plan to Avoid the ‘Fiscal Cliff’

January 2, 2013 at 12:00 AM EDT
Congress stepped back from the brink of financial turmoil after the House passed a tax plan that included the expiration of payroll tax breaks for all and the extension of Bush-era tax cuts for most. Judy Woodruff talks to Roll Call's Steven Dennis and the Washington Post's Neil Irwin about how it will affect most Americans.
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JUDY WOODRUFF: While much of the country kicked off the new year by going back to work today, Washington said its goodbyes to the 112th Congress, after a late night of final suspense on the fiscal cliff legislation. It gave the president much of what he wanted on taxes, and left Republicans sharply divided.

For President Obama, the end, for now, of the Washington budget drama meant returning to Hawaii today to resume his holiday vacation. But last night, before leaving, he welcomed House approval of the fiscal cliff bill.

PRESIDENT BARACK OBAMA: A central promise of my campaign for president was to change the tax code that was too skewed towards the wealthy, at the expense of working middle-class Americans. Tonight, we have done that.

JUDY WOODRUFF: The final vote in the House was 257 to 167 on a bill the Senate had already approved. It capped days of intense negotiations. The provisions will affect nearly all taxpayers. For individuals making at least $400,000 and couples making $450,000, income tax rates will go up from the current 35 percent to more than 39 percent.

For that same group, dividend and capital gains taxes will also rise to 20 percent, from 15 percent. And all income groups get hit by the expiration of a payroll tax break. It’s increasing 2 percentage points to 6.2 percent on the first $113,000 of income.

Ultimately, though, the vast majority of Americans get to keep their Bush era income tax cuts, contributing another $4 trillion to the deficit over 10 years. Republicans made a late push for offsetting spending cuts. When they failed to get them, 151 GOP lawmakers voted against the measure, including Congressman Darrell Issa of California.

REP. DARRELL ISSA, R-Calif.: I cannot believe that this tax cut will in fact be followed with the spending cuts to offset any part of the three — or, sorry — the $4 trillion we’re putting on the backs of future generations.

JUDY WOODRUFF: House Speaker John Boehner was among the 85 Republicans who voted for the bill.

But, in a statement, he promised to focus on a future deal that does cut spending.

He said: “The American people reelected a Republican majority in the House, and we will use it in 2013 to hold the president accountable for the balanced approach he promised.”

Many of the other Republicans who voted yes were committee chairmen, retiring lawmakers or members who lost their seats in the November elections.

Congressman Dave Camp of Michigan chairs the Ways and Means Committee.

REP. DAVE CAMP, R-Mich.: Republicans and the American people are getting something really important, permanent tax relief. As big as that is — and it’s only the first step when it comes to taxes — this legislation settles the level of revenue Washington should bring in.

JUDY WOODRUFF: Beyond the income tax provisions, the bill also reinstates Clinton-era limits on exemptions and deductions for higher-income Americans. And tax rates will rise from 35 percent to 40 percent for estates worth $5 million or more.

Congress also agreed to extend unemployment insurance for the long-term jobless for another year. Most Democrats had wanted more, but nearly all voted for the bill.

REP. SANDER LEVIN, D-Mich.: This legislation breaks the iron barrier that for far too long has prevented additional tax revenues from the very wealthiest.

JUDY WOODRUFF: In the Senate, the bill had sailed to overwhelming bipartisan approval early on New Year’s morning. Today, Majority Leader Harry Reid summed up.

SEN. HARRY REID, D-Nev.: It was a piece of legislation that we weren’t all elated about, but it moved the ball forward. We have so many more hard decisions to make in the year ahead.

SEN. JEFF SESSIONS, R-Ala.: This is not the way to run the Senate.

JUDY WOODRUFF: But Republican Jeff Sessions of Alabama warned that Congress can’t go on transacting its business this way.

JEFF SESSIONS: We are really too often using midnight-hour votes on the eve of a crisis to ram through big, historic legislation.

JUDY WOODRUFF: The president is expected to sign the bill, but there was no word on when he will do so.

To walk through how we got here and how the compromise deal will affect most Americans, we talk with two journalists who have closely followed each development.

Steven Dennis is a reporter for Roll Call, who covers the nexus between Congress and the White House. Neil Irwin covers economics and fiscal policy for The Washington Post.

And it’s great to have you both with us.

STEVEN DENNIS, Roll Call: It’s great to be here.

JUDY WOODRUFF: So, before we talk some more about what’s in the bill, Steven Dennis, let’s talk first about how we got to this high drama, last-minute, New Year’s Eve/New Year’s Day. How did it come down to this?

STEVEN DENNIS: Well, it was really a couple of years in the making.

You know, you had the Tea Party sweep in to power a couple of years ago. They wanted spending cuts for the last two years, and they really wanted to take on the big entitlement programs, Medicare, Social Security, Medicaid. And they have been basically unable to do it.

And here we are at the very end, you know, about to end, close out this Congress, and they were presented with a bill that they saw as a tax increase that they didn’t want to vote for, alongside no spending — no real spending cuts. And that was — that was a bridge too far for a lot of these Republicans, who have been wanting that big deal, the big spending cuts for two years and have been unable to really get them.

JUDY WOODRUFF: But even in the days leading up to this, was there a chance that the president, Speaker Boehner could have come up with something bigger?

STEVEN DENNIS: Well, part of the problem is a lot of these folks who voted no and wanted, you know, the spending cuts, they kept undercutting the speaker.

You know, the speaker kept trying to come up with a grand bargain and work out something with the president, and every time he tried to go out and offer something on revenues, his own conference would start sniping behind his back.

And, you know, a couple weeks ago, he had — pulled out from those talks again, trying to go his own way, and his own folks basically torpedoed his plan B, and basically, at that point, it was up to Mitch McConnell and ultimately Vice President Joe Biden to try to cobble together something. And they did.

JUDY WOODRUFF: In the end, you had overwhelming support in the Senate, but last night in the House, it passed, big margin, but most Republicans voted against it.

STEVEN DENNIS: Yes, and, you know, a similar thing happened on TARP for 2008.

JUDY WOODRUFF: The Troubled Asset Relief…

STEVEN DENNIS: That’s right. The Wall Street bailout, something very similar happened, where John Boehner, who was then the minority leader, said, hey, we need vote for this and save the economy. Most Republicans voted no, and it went down.

This time around, it passed. But, still, it’s something that passed overwhelmingly in the Senate. The House right now and House Republicans are really having a lot of internal turmoil as well within their leadership ranks. It’s not very often that you see the number two, the majority leader, Eric Cantor, voting against something that the speaker wants. The whip voted no, Mr. McCarthy.

Paul Ryan voted yes at the end. So they were very split on at least this tax bill, and they’re going to have a lot of, you know, soul-searching to do about the next cliff in a couple of months.

JUDY WOODRUFF: Well, setting the politics aside for a minute, Neil Irwin, let’s talk some more about what’s in the bill.

And, first, one part of this that will affect everybody — and that actually was not even in the bill, and it was the fact the payroll tax holiday, or payroll tax break, is now ending. What does that mean? Why is it happening?

NEIL IRWIN, The Washington Post: Right.

This was a stimulus measure that was introduced at the start of 2011. It has been with us for two years now. It’s a 2 percentage point cut in payroll taxes that affects every working American.

So, a typical family — typical worker who makes $50,000, that’s $1,000 a year in more after-tax income they have because of this holiday.

But it was temporary. It was designed to be temporary. We always knew it would go away eventually. And the question was, would it either be extended for one more year? Would there be offsetting stimulus measures to try and help the economy get along even without it? And neither of those things happened.

Instead, what we have is this thing has gone away as was scheduled. And so when people get that first paycheck in 2013, it will be a little less, a little lighter.

JUDY WOODRUFF: And some people may already be seeing it, if they got an early paycheck.

Well, now let’s talk about the income tax hike. The president wanted it on income over $250,000. It ended up at $450,000 for families. What percentage of Americans are actually going to be hit with this?

NEIL IRWIN: It’s a pretty small sliver. It’s 0.7 percent who are affected by the income tax increase.

There are other aspects to this deal that increases taxes on Americans who make over $250,000. That’s more like 2 percent of the population. But the major headline out of this is the income tax. And, as you say, we go back to Clinton-era rates for households making over $450,000 a year. That was a bit of a compromise. The president wanted $250,000. Congressional leaders, on the Republican side anyway, wanted no increase at all or at least to be a much higher level. And that’s where the negotiation ended up.

JUDY WOODRUFF: And you also have an increase in the estate tax, but on wealthier folks than the White House had originally wanted.

NEIL IRWIN: Right. This is another thing Republicans were fighting hard for in this negotiation, and that they won on, to a degree. And so we’re going to see an estate tax that has really been in flux for the last several years.

Ever since the original Bush tax cuts back in 2001, 2003, these last few years, it’s been very unclear what the estate tax will be from year to year.

It’s made it very hard to do planning. We may have some more stability on what that estate tax looks like now.

JUDY WOODRUFF: In the meantime, Neil, the vast majority of Americans will continue to enjoy the so-called Bush-era tax cuts. Those will stay and they have been made permanent.

NEIL IRWIN: That’s right. This is — in a way, this is — this vote yesterday was a big win for George W. Bush. If you look at his first achievement as president, first in 2001, then in 2003, it was cutting income tax rates on almost all Americans, including the middle class, including the upper class.

While they have been phased out for the very end of the income spectrum, for all those lower-, middle-, upper-middle-income taxpayers, those Bush-era tax rates are now frozen forever. They can be changed by Congress any time, but they no longer have an expiration date. They’re now in law.

JUDY WOODRUFF: And, Steven Dennis, why did that happen? Because we know that the White House didn’t want that originally. What happened with that?

STEVEN DENNIS: Well, this is about leverage.

Mitch McConnell was looking at the long run here and saying, OK, if these tax cuts keep expiring, they will keep being used as leverage against us, because we will face automatic tax increases, which we really don’t want as Republicans.

By taking that off the table, making them permanent, he gave the president a lot of what he wanted in this deal, which angered some of — some folks in his base, but he got a permanent solution. What does that mean?

That means next year, when they’re arguing over spending, if they don’t get what they want, something happens on spending, they don’t have their crown jewel, the tax cuts, potentially on the chopping block every year. That’s a big deal.

And that — they are already coming out and saying today and for the next couple of months, look, you got your tax increases. Now give us the spending cuts. We don’t want to give any more revenue.

So it’s going to be much harder for the president. This was his leverage moment to try and extract some things. And, you know, this might be all he gets for the next period of time here as far as revenue.