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First Thoughts on Emerging Fiscal Cliff Deal

As of this posting, a deal [1] between Congress and the White House appears to emerging to resolve the so-called “fiscal cliff,” the expiration of $5 trillion in tax cuts signed under Presidents Bush and Obama, $1.2 trillion in automatic spending cuts known as “sequestration,” the cessation of Unemployment Insurance for unemployed workers, and the expiration of various other tax policies, including the 2010 payroll tax cut and a range of business tax credits.

While nothing has been finalized (and indeed could easily unravel over the next few hours), the emerging deal represents a mixed bag [1] for the nation’s working and middle-income families—it extends a range of key middle-class tax cuts, but at the same time, continues large-scale tax breaks for the wealthiest Americans—and as a result—keeps the door open for spending cuts devastating to many working families.

In its current form, the deal focuses on the tax portions of the fiscal cliff, with sequestration yet to be resolved. According to multiple [1] press [2] accounts, the White House and Congress have tentatively agreed to permanently extend Bush-era tax cuts on incomes up to $450,000, while allowing tax cuts on incomes above this threshold to expire (although these households would still continue to receive tax cuts on the first $450,000 of their incomes).  Capital gains and dividend taxes will rise from 15% to 23.8% [2], and deductions and exemptions will be limited for incomes over $250,000 [3]—a likely down payment on comprehensive tax reform.  

At the same time, the deal makes several additional contributions to the economic security of working and middle income families.  Most importantly, the deal extends [1] Obama-era improvements to the Earned Income Tax Credit, Child Tax Credit, and American Opportunity Tax Credit, benefitting almost 500,000 North Carolina families and more than 1 million children [4]. Additionally, the deal also extends Unemployment Insurance, a policy many economists consider critical to supporting the nation’s sputtering economic recovery.

While it is certainly good news that that the middle-class tax cuts will be extended, raising the income threshold for tax increases from the President’s proposed $250,000 to $450,000 will raise $300 billion less in new revenues than the President’s proposal, which would have raised almost $1 trillion [5]. This means that there will be fewer revenues available for reducing federal budget deficits and ensuring a sustainable path for our national debt.  In turn, this will likely result in greater spending cuts to key programs that support economic growth and middle-class mobility—programs like K-12 education, Head Start, job training, and research and development.

And indeed, this points the way to the greatest problem with this emerging deal. Perhaps out of political necessity, this plan does not include any provision for lifting the federal debt limit—the statutory ceiling above which Congress has no authority to borrow. While historically, Congress has raised the debt limit with little fanfare or controversy, the leadership of the US House of Representatives reversed this approach in the summer of 2011 and held the debt ceiling increase hostage—despite the threat to the nation’s creditworthiness—in order to trigger deep cuts to non-defense discretionary spending.  Ironically, this strategy yielded the sequestration cuts that House leadership is trying to avoid as part of these negotiations.

Given that House leadership is again threatening a repeat performance [6] when the debt limit is reached next month, the reduced revenue from raising the tax increase threshold to $450,000 and—more importantly—the failure to include a debt limit increase in this deal simply opens the door to more and deeper cuts to vital programs like Social Security, Medicare, and Medicaid.

Although this emerging deal provides some benefits to working and middle-class families, there are some troubling longer-term implications that may threaten our ability to take a balanced approach to reducing federal budget deficits and reining in our national debt.