One Cliff Down and Three to Go

After a roller coaster of a day, the House of Representatives voted 257 to 167 to accept the ugly budget compromise that the U.S. Senate passed 89 to 8 in the wee hours of New Year’s morning.

That followed what appeared to be yet another palace revolt against House Speaker John Boehner in which members of his caucus angrily denounced the Senate bill, which raised taxes without cutting spending much and would actually increase the national debt by $4 trillion over the next decade, according to the Congressional Budget Office.

Ultimately, under intense pressure, Speaker Boehner brought the Senate bill to the House floor for a vote—as is, without amendments. The bill got nearly all Democratic House members and 85 Republicans, more than a third of the GOP caucus.

Boehner voted yea and so, significantly, did former GOP vice presidential candidate Paul Ryan. (A possible opponent for the 2016 Republican presidential nomination, Senator Marco Rubio of Florida, was one of eight senators to vote no.)

Boehner’s number-two man, Majority Leader Eric Cantor, and his whip, Rep. Kevin McCarthy, also broke with his Speaker and voted no.

Here are some things the bill will do:

  • Make the 2001 and 2003 Bush tax cuts permanent for everyone earning under $400,000 (singles) or $450,000 (couples); every dollar above that would pay the Clinton-era top rates of 39.6%.
  • Raise rates on capital gains and dividends to 20% from 15% for taxpayers above the $400K/$450K threshold.
  • Raise the estate tax to 40% from 35% on estates over $5 million
  • Permanently fix the alternative minimum tax by indexing it to inflation
  • Keep extended unemployment benefits through 2013

But it won’t continue the payroll-tax holiday, so those taxes will be going up on workers and businesses. And most importantly, it will delay for two months the day of reckoning in which $110 billion in automatic cuts in defense and domestic spending for this year (and $1 trillion over the next decade) go into effect.

That sets up the Triple Crown of budget battles in March: the deadline for deciding on what spending cuts should be made; the deadline for the current continuing resolution for funding the US government, and of course the debt ceiling—again.

Late Tuesday night President Obama appeared in the White House briefing room to claim a limited victory. He will get $620 billion in new tax revenues from this deal, much less than he asked for and at an income threshold higher than he envisioned.  And he will get extended unemployment benefits for another year.

He acknowledged there will be no grand bargain in this sharply partisan environment, although there could be several small deals like this one that add up to what the president has called a “balanced” approach to deficit reduction.

Future deals, of course, will need a lot more spending cuts than this one did—including working out how the automatic cuts will work. And Republicans are looking for the next debt ceiling deadline as a chance to get payback for what they view as a terrible deal.

President Obama once again strongly stated he would refuse to negotiate on that. “We can’t go down that path again,” he said. This is setting up another truly epic battle in March when the next deadlines hit, and the markets and the American people should be prepared for another wild ride around then. It ain’t over ‘till it’s over, as they say.

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