Budget bill sails through House, goes to Obama

Tax rates for higher earners to go up, as does cap gains; 'legacy vote'

Jan 1, 2013 @ 10:36 pm

By Mark Schoeff Jr.

fiscal cliff
+ Zoom

After several hours of strong resistance from conservatives who criticized it for not addressing the burgeoning federal debt and deficit, the House approved a measure Tuesday at 11:02 p.m. that resolves the so-called fiscal cliff.

By a 257-167 margin, the House followed an overwhelming Senate vote, 89-8, that occurred about 21 hours earlier on New Year's Day. The measure now goes President Barack Obama for his certain signature.

The legislation stops approximately $600 billion in tax increases and automatic spending cuts that threatened to throw the U.S. economy back into recession. The country had technically gone over the cliff for a day before the House passed the fiscal-cliff bill.

The legislation stops approximately $600 billion in tax increases and automatic spending cuts that threatened to throw the U.S. economy back into recession. The country had technically gone over the cliff for a day before the House passed the fiscal-cliff bill.

The measure allows Bush administration tax cuts to expire for households earning more than $450,000 – boosting the top rate from 35% to 39.6% -- while locking in the lower Bush rates for earnings below that level.

President Barack Obama originally wanted to set the threshold at $250,000. The higher level was the result of negotiations between Senate Minority Leader Mitch McConnell, R-Ky., and Vice President Joe Biden, who hammered out the Senate bill.

The measure makes permanent a capital gains and dividend rate of 20% for households making more than $450,000 and 15% for those below that level. It also adds to the tax code the alternative minimum tax exemption, protecting nearly 30 million Americans who would have been hit by that levy this year.

The bill sets an estate tax rate of 40% with a $5 million individual exemption – a rate increase from the current 35% but much lower than the 55% rate and $1 million exemption that would have gone into effect if the Bush tax cuts had expired.

The fiscal-cliff bill also extended unemployment benefits for the long-term jobless for a year and ended the 2% reduction in the payroll tax.

Rep. Dave Camp, R-Mich. chairman of the House Ways & Means Committee, called the House action on Tuesday night a “legacy vote."

“We're making permanent tax policies Republicans originally crafted," said Mr. Camp, who promised his panel would conduct comprehensive tax reform this year.

What the fiscal-cliff bill did not do is address the approximately $1 trillion federal deficit and $16.4 trillion debt.

It delayed for two months $110 billion in domestic spending cuts slated to go into effect on Tuesday. That slowdown was funded in part by a provision that would allow workers to rollover 401(k) retirement plans into Roth versions of those accounts, a move that would be taxed and increase government revenue.

The fact that the bill put off congressional decisions on spending cuts drew the ire of conservatives.

“It's a tax bill and doesn't have any spending cuts in it at all," said Rep. Marlin Stutzman, R-Ind., a member of the House Financial Services Committee. “If we don't get spending cuts, I'm not interested in talking about letting taxes go up.”

That sentiment was echoed by enough of Mr. Stutzman's Republican colleagues that House Speaker John Boehner, R-Ohio, polled the GOP caucus on whether there was enough support to ensure a majority for an amendment that would add spending cuts to the Senate fiscal cliff bill.

That so-called whip count fell short. Mr. Boehner then decided to bring the Senate bill to the House floor for a straight up or down vote. If the measure had been amended, it risked killing the bill and forcing the legislative process to restart when a new Congress is seated on Thursday.

The battle over spending cuts and reducing the costs of social insurance programs is sure to flare up again soon. In about two months, the Treasury Department's borrowing authority to fund the federal debt will be breached. Raising the ceiling requires congressional approval.

Having scrambled to avert the fiscal cliff just before – in fact shortly after – the deadline, Congress will have to grapple with what could be a similarly fraught effort to bump up the debt ceiling.

In addition, Congress will have to vote by the end of March on a so-called continuing resolution to maintaining the current federal budget.

“In the fairly near term, we'll have other opportunities to demand entitlement reform," said Rep. Todd Young, R-Ind.

One investment adviser said that spending issues are more important than the tax matters that were resolved over the last 24 hours.

“The lack of long-term solutions to deal with Social Security, Medicare and [regulation] will be the linchpin that makes or breaks the economy, not [the] fiscal cliff," Scott Moser, owner of Moser Wealth Advisors, wrote in a recent email.

Another adviser is happy with the certainty that the fiscal-cliff bill brings to many tax rates.

“The best thing is that we know what we're dealing with," said Tim Steffen, senior vice president and director of financial planning at Robert W. Baird & Co. “It's better than having nothing happen, which would have been bad for everyone."


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


Ed Slott: 3 questions to ask before converting to a Roth IRA

To do a Roth conversion, money has to be spent. Here is what financial advisers and their clients should consider before they incur tax costs, according to Ed Slott, founder of Ed Slott's Elite IRA Advisor Group.

Latest news & opinion

Alternative strategies boomed after crisis, but haven't been tested

Because the S&P 500 has outperformed, convincing clients they need protection is a hard sell.

7 ways advisers fixed clients' biggest financial dilemmas

Sometimes it takes creativity, along with knowledge and outside help, to get a client out of a jam.

LPL Financial buys NPH, a broker-dealer network with 3,200 advisers

The deal, part of which is based on the advisers and revenue that eventually will move from NPH, could potentially cost LPL $448 million.

3 things advisers should make sure their clients' children take to college

Advisers can help clients avoid scary and painful situations with kids age 18 and older.

Private equity investors zero in on the RIA business

P-E proves to be ready and willing to invest in RIAs, but many will be looking to sell in three to seven years.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print