The U.S. Senate early this morning overwhelmingly passed fiscal cliff legislation that would avert a tax increase on individuals making less than $400,000 and couples earning less than $450,000 that’s otherwise scheduled to occur today. House Republican leaders are meeting early this afternoon to decide when they might take up the bill. The legislation also extends the farm bill through September, averting the so-called Milk Cliff.
The legislation doesn’t address an increase in payroll taxes that takes hold today. To encourage spending during the recession, Congress in 2011 had temporarily lowered payroll taxes from 6.2% to 4.2%. That change expires today, and payroll taxes revert to their old level. A household earning $30,000 would have $50 less to spend per month.
Individuals making $250,000 and married couples earning $300,000 or more would also face a tax hike. In a nod to President Barack Obama, who had pledged during his campaign to raise taxes on household earning $250,000 or more, the legislation would cap tax exemptions for individuals earning $250,000 or more. Tax advisers are anxiously awaiting the details of that provision.
The Obama Administration, which had proposed reducing the ceiling for escaping estate taxes from $5 million to $3.5 million, gave in on that issue. The Senate bill leaves the threshold at $5 million. But it raises taxes on those estates from 35% to 40%. Also, in a significant concession, the bill indexes the estate tax threshold to inflation.
The legislation would raise tax rates on capital gains and dividends for high-income earners as well. Rates for individuals making $400,000 or more and families earning $450,000 or more would increase from 15% to 20%. That’s in addition to the 3.8% increase already slated to go into effect from the health bill. The increase in capital gains and dividend income rates is far less than the 39.6% first proposed by the Obama administration.
In a prelude to a possible fight in the House, Rep. Chris Van Hollen, (D-Md.), the ranking Democrat on the House Budget Committee, said indexing would raise the threshold to $7.5 million for individuals and $15 million for households by 2020. He called the bill a "sweetheart giveaway to the wealthiest 7,200 estates in the country," according to the Washington Post.
The bill delays automatic sequestration for two months. Without such a provision, automatic cuts to federal agency budgets –- in the 8% to 10% range -- will take effect Wednesday. To pay for a two-month reprieve, the Senate plan devotes $12 billion in new tax revenue and $12 billion in spending cuts, split equally between defense and domestic programs.
The Senate-passed bill does the following:
- raises income tax rates from the current 35% to 39.6% for individuals making more than $400,000 and couples making more than $450,000.
- caps itemized deductions for individuals making $250,000 and married couples earning $300,000.
- extends tax breaks for college tuition.
- continues unemployment insurance for a year for 2 million people.
- permanently adjusts the alternative minimum tax to inflation.
- renews tax credits for child care, tuition and research and development.
- reimburses doctors who accept Medicare patients.
- extends current farm policies through September.
- increases from 15% to 20% tax rates on capital gains and dividend income for individuals making more than $400,000 and families earning $450,000 or more.