UPDATED - 11:07 PM CT - McConnel, Biden Reach Fiscal Cliff Accord

December 29, 2012 06:30 PM

via a special arrangement with Informa Economics, Inc.

Partial farm bill extension included, but no new dairy program, energy program funding and disaster aid

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Updates (most current is last):

Senate Majority Leader Harry Reid (D-Nev.) announced Sunday afternoon that negotiations with his Republican counterpart to avoid the "fiscal cliff" have hit an impasse. Reid told colleagues on the Senate floor that Senate Republican Leader Mitch McConnell (R-Ky.) had shown good faith in the talks but the two could not bridge major policy disagreements. "At this stage, I don’t have a counteroffer to make. Perhaps as the day wears on I will be able to," Reid said. "I think that the Republican leader has shown absolutely good faith. It’s just that we’re apart on some pretty big issues." In the absence of an agreement between Reid and McConnell, Reid will bring to the floor a default bill that extends the Bush-era income tax rates for family income below $250,000 and extends unemployment benefits.

Meanwhile, McConnell said he called Vice President Joe Biden, who he has worked with in the past and who he hopes can "jump start" the negotiations, to which Reid responded "I wish them well." "I want everyone to know I'm willing to get this done, but I need a dance partner," McConnell said.

McConnell, according to other Republican senators, is willing to drop the Social Security demand. "We need to take CPI off the table," said Sen. John McCain (R-Ariz.). "That is not part of the negotiations because we can't win an argument that has Social Security for seniors versus taxes for the rich so we need to take it off the table."

Reid late Sunday afternoon said Democrats have made a counteroffer to the Republicans, although he did not provide details.

Sen. Dick Durbin (D-Ill.) said Democrats floated a different income threshold for increasing tax rates on top earners. He said they offered $360,000 for single filers and $450,000 for household filers, less than the Republican offer of $450,000 for single filers and $550,000 for household filers.

Reid said on the Senate floor Sunday evening he will continue working with McConnell and alerted colleagues to expect the next update Monday morning. "There is still significant distance between the two sides but negotiations continue," Reid said. "There is still time left to reach an agreement, and we intend to continue negotiations. We’ll have further announcements perhaps at 11:00 in the morning, I certainly hope so," he said.


Both sides are still trying to turn off $109 billion in sequester cuts to defense and non-defense spending. Democrats want to use the new tax revenue from allowing some of the Bush era rates to expire to offset turning off the sequester, The GOP wanted chained CPI as the replacement but has since backed away from that approach. "If that is unacceptable to them they need to come up with an alternative," Sen. John Thune (R-S.D.) said. Also, Democrats are reportedly demanding that the deal turn off two years of automatic spending cuts, not just those in 2013 – something Republicans do not support.


Some observers say House GOP leaders may prefer not to vote on any deal until Jan. 2, when any agreement would technically represent a tax cut after rates go up on Jan. 1.

Negotiators have yet to settle several major issues, including allowing income tax and estate tax rates to increase at higher levels, if and how long to avert automatic spending cuts and proposals that would alter the costs of entitlement programs.

Democrats acknowledge they will not be able to include stimulus funding for transportation and infrastructure projects. Republicans say Democrats have dropped their demand to raise the debt ceiling.


Some items being discussed would cost the government. One would extend unemployment benefits for one year, at a cost of roughly $30 billion. Another would prevent Medicare payments to doctors from being cut, at a cost of $10 billion, according to estimates.


The most expensive item being considered would extend a change to the alternative minimum tax. The change being considered would prevent the tax from hitting as many as 30 million additional households, and it would reduce potential revenue by close to $100 billion.  


If the Senate approved a deal on Monday evening or Tuesday morning, it would give the House a chance to vote on New Year's Day before the markets open again on Wednesday.


Democrats give ground on estate tax issue, promising to stage a vote in the Senate that would guarantee that taxes on inherited estates remain at their current low levels, a key GOP demand.  


Republicans oppose a Democratic proposal to raise taxes on investment profits for households with income above $250,000. Democrats insisted that tax rates on dividends and capital gains rise to 20 percent — from the current 15 percent — for couples and individuals above the lower thresholds. Those taxpayers would also lose some of the value of their personal exemptions and itemized deductions under the Democratic proposal.


Regarding revenue, Democrats initially insisted on at least $1.2 trillion in new tax revenue over the next decade. The deal under discussion would raise far less than that, somewhere between $600 billion and $800 billion.


McConnell and VP Biden are reportedly nearing an agreement that would hike tax rates for families who earn more than $450,000, and individuals who make more than $400,000.


Capital gains tax rate: On Saturday, the two sides traded offers to create a 20 percent capital gains tax rate for higher incomes, Sens. Dick Durbin (D-Ill.) and Olympia Snowe (R-Maine) separately told CNN that lower incomes would keep the current 15 percent rate. But, the senators said, the two sides had not agreed on the income level that would trigger the higher taxes. Snowe said $250,000 was one level discussed. If Congress doesn't act, the current capital gains rate of 15 percent will automatically go up to 20 percent for all investors.


President Obama said on Monday that a deal to avert the fiscal cliff of automatic tax hikes and spending cuts seems to be "within sight." Recent talks between McConnell and VP biden have reportedly yielded substantial progress and a deal is now in sight. One glitch remaining: whether to delay across-the-board spending cuts known as the sequester.

A fiscal cliff accord is about completed, sources inform. The agreement is expected to extend Bush-era income tax rates on individual income up to $400,000 and on family income up to $450,000. It will also reportedly adjust the estate tax rate to 40 percent, up from 35 percent, but maintain the exemption for all inheritances below $5.12 million. As a concession to liberals, the emerging package would extend refundable tax credits for a period of five years, according to The New York Times. The biggest remaining obstacle is $109 billion in automatic cuts to domestic discretionary and defense spending due to take effect in 2013.


Senate GOP Leader Mitch McConnell (R-Ky.), in remarks on the Senate floor, said after reaching out to Vice President Joe Biden to get things done, "the effort has been a successful one. We are very, very close to an agreement." He added that, "We have reached agreement on all the tax issues."Senate GOP Leader Mitch McConnell (R-Ky.), in remarks on the Senate floor, said after reaching out to Vice President Joe Biden to get things done, "the effort has been a successful one. We are very, very close to an agreement." He added that, "We have reached agreement on all the tax issues." 

President Obama announced Monday afternoon the deal would extend tax credits for families with children, college tuition tax breaks, and tax incentives for renewable energy development. It will also extend unemployment benefits, a key Democratic demand. Biden, meanwhile, will visit the Senate Monday afternoon to give Democratic lawmakers an update on the talks. The biggest remaining obstacle is $109 billion in automatic cuts to domestic discretionary and defense spending due to take effect in 2013. Democrats want to pay for delaying sequester cuts with the additional revenue collected from raising taxes on wealthy families, but Republicans have rejected this.


Some details of likely fiscal cliff accord. The accord would permanently raise tax rates on households making more than $450,000 a year. It would also raise rates on capital gains and dividends for those households, from 15 percent now to Clinton-era levels of roughly 20 percent. The apparent would limit the number of personal exemptions as well as the value of itemized deductions, two restrictions that would kick in at $250,000 for individuals and $300,000 for couples. Those limits were abolished as part of the 2001 Bush tax revamp. The compromise would set the estate tax at 40 percent on inheritances over $5 million, up from the 35 percent that applies now to estates over $5.12 million. The potential deal calls for a permanent fix to the alternative minimum tax, a one-year extension of unemployment insurance benefits, and a five-year extension of other tax breaks. It also would block a scheduled cut in Medicare payments to doctors for one year.

Usually reliable sources signal that the coming agreement on some fiscal cliff issues will include a two-year extension of the lapsed biodiesel tax incentive program -- retractive to 2012, and then 2013.


Details of Fiscal Cliff Agreement

Senate to vote on plan early Tuesday | House has not yet scheduled vote 


The details of a fiscal cliff agreement on tax-related issues contain the following:


Income taxes: Permanently extend all the 2001 and 2003 tax rate for individuals with annual incomes below $400,000 and couples with incomes below $450,000; rates for those with incomes above those thresholds would rise to 39.6 percent from 35 percent.


Payroll tax: The small cut in the Social Security tax for all earners will be allowed to expire.

Alternative minimum tax (AMT):
Permanently patch the alternative minimum tax and prevent the parallel tax system from creeping further into the middle class and eliminate the near annual debate on indexing the income exemption levels.


Dividends and capital gains: Permanently extend the 15 percent top tax rate on dividends and capital gains for individuals with annual incomes below $400,000 and couples with incomes below $450,000; increase the top tax rate on dividends and capital gains to 20 percent for those with incomes above those thresholds. The highest earners will actually see that rate rise to 23.8 percent because of an additional 3.8 percent investment tax included in the 2010 health care overhaul.


PEP and Pease deduction caps: Permanently extend a phase-out of the personal exemption and limit the availability of itemized deductions for individuals with annual incomes above $250,000 and couples with incomes above $300,000. These are commonly known as PEP, for personal exemption phase-out, and Pease for the late former Rep. Don J. Pease, an Ohio Democrat who helped write the itemized deductions limit. Under former President George W. Bush, these deduction caps were suspended.


Estate tax: The estate tax will have a $5 million individual exemption (double for spouse), with additional inheritance taxed at 40 percent.


Unemployment benefits: Additional benefits for the long-term unemployed are extended through the end of 2013. Those benefits expired on Friday.


Business tax credits: Retroactively renew a package of one- or two-year reauthorizations of tax "extenders," which range from a credit for business research and development expenses to a state and local sales tax deduction that the Senate Finance Committee adopted in August (S 3521) with bipartisan support. The agreement reportedly includes a two-year extension of the lapsed biodiesel tax incentive program -- retractive to 2012, and then 2013.


Stimulus tax credits: A five-year extension of tax credits largely used by lower- and middle-class workers that were expanded as part of the stimulus, including the Child Tax Credit, Earned Income Tax Credit and the American Opportunity Tax Credit that provides up to $10,000 for four years of college.


Bonus depreciation: Extend for one year the 50 percent bonus depreciation allowing businesses to write off the entire cost of major purchases in the year they are made rather than depreciate those expenses over many years.


"Doc fix": Stops a 27 percent reduction in payments to Medicare providers using spending cuts as offsets.


Partial 2008 Farm Bill extension. The agreement would include a one-year (through Sept. 2013) partial extension of the 2008 Farm Bill. It would include direct payments for 2013 crops. It would not include language for a controversial new dairy gross margin/supply management program but instead extend the Milk Income Loss Contract (MILC) program at lower rates that took effect in September. It would not provide nearly $850 million in disaster aid that was contained in an extension plan agreed to by Senate and House Agriculture Committee leaders. The plan does not include the funding of energy provisions and other expired pgorams in the 2008 Farm Bill.


Budget Sequester:  Negotiators have agreed to postpone the automatic spending cuts known as the sequester for two months. The $24-billion cost of delaying the sequester would be offset by other cuts so as not to add to the deficit.  The deal pays for delaying the sequester with a mix of new taxes and spending cuts, according to a person familiar with the matter. Reportedly, $12 billion of that would come from a shift in the rules affecting workplace-based 401(k) plans. The remaining $12 billion was paid for with spending cuts.

Saturday saw the top senator from each political party and/or their staff trying to come up with a compromise package
to deal with some but not all portions of a fiscal cliff package, as a White House meeting Friday afternoon made clear there is still a chance of a scaled-back accord. Saturday negotiations focused on income and estate taxes, and discussions on the farm bill, including an extension of the 2008 Farm Bill. Talks and negotiations continue on Sunday, with a negotiating glitch occurring between the two political parties -- GOP negotiators are apparently insisting on including the chained consumer price index (CPI), a way to adjust government benefits with inflation, but Democratic negotiators pushed back against the GOP initiative.


President Barack Obama met with all four congressional leaders late Friday in an hourlong meeting in the Oval Office to review a list of options. He later said he was "modestly optimistic" a deal could be reached, but he warned that the public's confidence in the US political system was at stake. "The American people are not going to have any patience for a politically self-inflicted wound to the economy," he said

"We had a good meeting down at the White House and we are engaged in discussions…in the hopes that we can come forward as early as Sunday" with a plan, said Senate Minority Leader Mitch McConnell (R-Ky.). "We'll be working hard to try to see if we can get there in the next 24 hours," he said, adding he was "hopeful and optimistic."

Senate Majority Leader Harry Reid (D-Nev.) called the meeting "constructive" but said, "Whatever we come up with is going to be imperfect. Some people aren’t going to like it. Some people will like it less," But "we’re going to do the best we can for the country that’s waiting for us to make a decision."


The weekend talks are being led by the two senators' chiefs of staff -- David Krone for Reid, and Sharron Soderstrom for McConnell -- communicating largely over the phone and by e-mail, aides said.


Ongoing negotiations between Reid and McConnell suffered a setback Sunday after Republicans reportedly demanded the inclusion of a new method for calculating entitlement benefits as part of the fiscal cliff package. The provision, known as "chained CPI," is opposed by many Democratic lawmakers who say it would result in lower payments for Social Security beneficiaries. However, the change was included in the Obama/Boehner negotiations that collapsed recently. Democrats say chained CPI was only on the table as part of a larger agreement to get an extension of the expiring debt limit. Democrats were surprised by the GOP’s request and thought there was a mutual understanding between the parties that the CPI would not be on the table if the debt limit increase were not as well, which it is not.



Obama said Reid and McConnell have the weekend to reach and pass a deal. To satisfy the constitutional requirement that revenue measures originate in the House, the Senate would take up a House-passed tax bill (HR 8) and use it as a vehicle for a compromise that would take its place as a substitute amendment. If a deal is reached, the Senate could vote on it as early as Sunday, with a critical House vote on either Sunday or Monday. If a deal is not reached, Sen. Reid planned to have a vote Monday on a tax package that would conform to Obama’s preferred policies. The bill would permanently extend tax cuts on income below $250,000 for couples, index the alternative minimum tax to inflation for 2012 and prevent payment cuts to physicians and tax estates at 2009 levels, with a top rate of 45 percent and a $3.5 million exemption.

Importantly, Obama zeroed in on a fallback plan when he asked Reid and House Speaker John Boehner (R-Ohio) to bring up a bill to extend income-tax rates for income under $250,000 and unemployment-insurance benefits if Senate leaders can't reach agreement. "The hour for immediate action is here, it is now," he said.

Also of note, Obama left open the possibility of going higher than $250,000 for the cutoff level for extending tax rates, a senior administration official said. Senate Republicans have signaled they could accept some kind of compromise that would raise the threshold for income tax increases to $400,000. The $400,000 threshold has practical benefits, Republican aides said: It would limit tax increases to the very top tax bracket rather than the top two brackets. And it would avoid a quirk of the tax code that would cause rates to rise more dramatically for those earning between $250,000 and $400,000 than for households with much larger incomes. Sen. Dick Durbin (D-Ill.) said Democrats floated a different income threshold for increasing tax rates on top earners. He said they offered $360,000 for single filers and $450,000 for household filers, less than the Republican offer of $450,000 for single filers and $550,000 for household filers.


Observers signaled that a potential bipartisan agreement could include an extension of current income-tax rates for most Americans; a measure to block a scheduled expansion of the alternative minimum tax (AMT); an extension of unemployment benefits, a measure to prevent a scheduled cut in Medicare payments to doctors, and a measure blocking a Jan. 1 increase in the estate tax. Republicans and many Senate Democrats from states with large family farms want to maintain the current tax structure, which exempts estates worth up to $5.12 million and taxes those above that level at 35 percent. Obama has proposed a $3.5 million exemption and a tax rate of 45 percent, a proposal more acceptable to liberal Democrats. On Jan. 1, it is scheduled to rise to 55 percent beginning with inheritances exceeding $1 million (double for spouse). The plan would also extend a raft of already expired business tax cuts, like the research and development credit, and would renew tax cuts for the working poor and the middle class included in the 2009 stimulus law. Some other issues are on the table, including elements of a stalled farm bill such as extending all or part of the 2008 Farm Bill.


Reports have surfaced that President Obama has said he would not give Republicans concessions on both income and estate taxes. Thus, if he agreed to move the income tax threshold up from $250,000, Republicans would have to accept an increase in the estate tax.


The coming package nor the recent White House plan do not include an extension of the payroll tax cut, signaling that the tax would rise to 6.2 percent from the current 4.2 percent. That is worth $95 billion in revenue, according to the Tax Policy Center. But a return to the 6.2 percent rate would trim the nation's growth rte by about half a percentage point next year, according to some estimates. That is a big amount for a US economy growing at an anemic 2 percent pace.

Obama wanted to postpone the $109 billion in spending cuts due to take effect Jan. 2, but Boehner reportedly said he wouldn't agree unless other programs were cut to compensate. Most observers now believe spending cuts would not be addressed in the coming package – nor would there be an increase in the debt limit.


If the $109 billion in across-the-board spending cuts are not delayed or dealt with, the government and its workers would begin feeling the cuts to defense and domestic spending. Without a compromise, the Pentagon and its civilian contractors would face steep reductions in virtually every program. Military officials said those spending reductions — $500 billion over 10 years — would eventually force the canceling or shrinking of projects and large-scale layoffs of military and civilian personnel. Many other federal programs would see cuts, beginning in late January. These include reductions of about 8 percent in the Special Supplemental Nutrition Program for Women, Infants, and Children; the Low-Income Home Energy Assistance Program; and rental housing assistance.


According to the Bipartisan Policy Center, implementation of the sequester would reduce economic growth in calendar year 2013 by half a percentage point and cost the economy roughly a million jobs, most from the private workforce of federal contractors.

Meanwhile, Republicans reportedly want to trim a package of targeted, temporary tax breaks known as extenders and are taking particular aim at a collection of 2009 stimulus tax breaks.



The eventual critical question is how the House would respond to any Senate deal. According to a spokesman, Boehner told the president the House would consider whatever bill passes the Senate, either accepting or amending it.

Boehner told his members during a Thursday conference call that he doesn’t want to let a bill come to the House floor that would pass with mostly Democratic support. The speaker wants a big majority of the House GOP Conference behind any deal before he gives it his approval.The House is scheduled to reconvene Sunday evening and House Republicans are scheduled to hold a closed-door party meeting Monday morning, most likely to review whatever deal might emerge from the upper chamber.


House Rules Chairman David Dreier (R-Calif.) said the Rules Committee is planing to possibly have a hearing on Sunday afternoon that would set the voting terms for a fiscal cliff deal that could be on the floor as early as Monday. "We’ve been working, and we’re ready to go as soon as we come up with something," Dreier said. House GOP leaders have told members they may be needed for votes up to the end of the 112th Congress later Jan. 3. Dreier said he was working through several scenarios that would allow for the completion of legislation by Jan. 3. He stressed in an interview with Congressional Quarterly that any agreement would require thorough review and support from Speaker John Boehner (R-Ohio) and his team, as well as consensus support in the House Republican Conference.

Timeline. Reid said he would hold a Democratic caucus meeting Sunday to give his colleagues a chance to review any compromise he reaches with McConnell. Reid said the Senate would not be in session Saturday but would return to work Sunday to vote on other business at 2 p.m. ET. He said Democrats would meet following the afternoon votes.


Comments: Even if a bipartisan package is agreed to, the end result could do little to reduce the deficit, with some observers saying it could actually expand the deficit, with the hard choices ahead for spending cuts, including Medicare and Social Security. Those cuts could be part of the coming debate in 2013 to increase the country's borrowing limit. White House officials told corporate executives Friday evening they hoped the package currently under consideration could pave the way for Democrats and Republicans to reach an agreement on a substantive deficit-reduction package next year. Still, the latest talks are far from the original negotiating goal of reducing the deficit $4 trillion over 10 years.


Some of the additional costs that could likely be in any bipartisan package would extend emergency unemployment benefits for one year, at a cost of roughly $30 billion. Another would prevent Medicare payments to doctors from being cut close to 27%. This change would cost another $10 billion, according to estimates.


Compared with an extension of current policy, the bill would raise about $760 billion over 10 years, according to Citizens for Tax Justice, a nonprofit research group. Raising rates only on income above $400,000 or $500,000 would shave at least $100 billion from that total, and continuing to tax estates with a 35 percent top rate and a $5.12 million exemption would cost another $120 billion or so.


But the most expensive item being considered as part of the package would extend a change to the alternative minimum tax and prevent it from hitting as many as 30 million additional households. That change would reduce potential revenue by close to $100 billion.



NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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