The House passed a deal to avert an income tax rate increase on middle-class families on Tuesday night, following a New Year’s Eve vote by the Senate, sending the bill to President Obama for his signature.
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House lawmakers voted for the bill by a 257 to 67 margin, after the Senate’s 89 to 8 vote, in a rare New Year’s Day session of a lame-duck Congress (see Senate Approves Post-Midnight Fiscal Cliff Deal, Shifting Pressure to Boehner). Vice President Joe Biden and Senate Minority Leader Mitch McConnell, R-Ken., worked out the final deal this week following a stalemate in negotiations between Obama and Speaker of the House John Boehner, R-Ohio.
Republican lawmakers had threatened to amend the bill with deep spending cuts to offset the tax cuts and send it back to the Senate, but with time running out before the re-opening of the financial markets on Wednesday morning, Boehner ultimately decided to allow an up or down vote on the bill.
The deal restores the top 39.6 percent rate for high-income households in effect during the 1990s. That rate would apply to single taxpayers with incomes above $400,000 and married couples with incomes above $450,000, up from 35 percent.
“Under this law, more than 98 percent of Americans and 97 percent of small businesses will not see their income taxes go up,” said Obama in a speech following the vote. He pointed out that the agreement reduces the deficit by raising $620 billion in revenue from the wealthiest households.
"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," he said. "Tonight we've done that. Thanks to the votes of Democrats and Republicans in Congress, I will sign a law that raises taxes on the wealthiest 2 percent 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."
In addition, the agreement provides a permanent and retroactive patch for the alternative minimum tax to prevent it from ensnaring middle-class taxpayers. The bill indexes the exemption amounts to adjust them for inflation.
The capital gains tax rate would return to what it was under President Clinton, 20 percent, up from 15 percent. Counting the 3.8 percent surcharge from the Affordable Care Act, dividends and capital gains would be taxed at a rate of 23.8 percent for high-income households. These tax rates would apply to singles above $400,000 and couples above $450,000. The top capital gains rate would stay at 15 percent for lower-income taxpayers.
The agreement reinstates the Clinton-era limits on high-income tax benefits, the phaseout of itemized deductions (Pease) and the Personal Exemption Phaseout (PEP), for couples with incomes over $300,000 and singles with incomes over $250,000. These two provisions reduce tax benefits for high-income households. This sets the stage for future balanced approaches to deficit reduction, which could include additional revenue through tax reforms that reduce tax benefits for Americans making over $250,000.
The deal did not include an extension of the 2011 and 2012 payroll tax cut on Social Security tax withholding from paychecks, so most workers will see their Social Security taxes rise from 4.2 to 6.2 percent (see IRS Changes Income Tax Withholding Tables for 2013 to Reflect Expired Tax Cuts).
The agreement also raises the tax rate on the wealthiest estates from 35 percent to 40 percent, with an exemption of $5 million per person.
There is also a one-year extension of 50 percent bonus depreciation, and the extension of various tax breaks. The deal extends President Obama’s expansions of the Child Tax Credit, Earned Income Tax Credit, and the American Opportunity Tax Credit, which helps families pay for college. The agreement would extend the tax breaks for five years.
In addition, the agreement will prevent 2 million people from losing unemployment insurance benefits in January by extending emergency unemployment insurance benefits for one year.
The bill also extends renewable energy incentives and other business tax incentives through the end of next year. They include extensions of the Production Tax Credit, a key incentive for renewable energy, as well as the Research & Experimentation tax credit.
The agreement also avoids a 27 percent cut to reimbursements for doctors seeing Medicare patients for 2013 by fixing the sustainable growth rate formula through the end of next year (the “doc fix”). It also renews a price support program for the dairy industry to prevent a sharp increase in milk prices, as well as blocks a pay increase for Congress.
In addition, the bill postpones the sequester for two months, paid for with $1 of revenue for every $1 of spending, with the spending balanced between defense and domestic. The agreement saves $24 billion, half in revenue and half from spending cuts which are divided equally between defense and nondefense programs, in order to delay the sequester to give Congress time to work on a balanced plan to end the sequester permanently through a combination of additional revenue and spending cuts in a balanced manner.
Obama promised further deficit reductions would be worked out with Congress, but he indicated that he would not allow a fight over raising the debt ceiling to derail the economy, insisting he would not “have another debate with this Congress over whether or not they should pay the bills they’ve already racked up.”
However, Republicans indicated that they would push for further spending cuts. “Now the focus turns to spending,” said Boehner. “The American people re-elected a Republican majority in the House, and we will use it in 2013 to hold the president accountable for the ‘balanced’ approach he promised, meaning significant spending cuts and reforms to the entitlement programs that are driving our country deeper and deeper into debt.”