The compromise to avoid the “fiscal cliff” was just a first step, according to all three Capital Region members of the U.S. House of Representatives.
The House passed a Senate deal late Tuesday night that raised income tax rates for a tiny fraction of the country, extended various tax credit and benefit programs, renewed the Farm Bill and included a small amount of spending cuts to delay more drastic cuts for at least two months. The package is expected to raise about $620 billion in revenue over the next decade and is generally expected to be followed in the near future by a long-term agreement on the country’s taxing and spending policies.
If an agreement had not been enacted, across-the-board spending cuts and tax increases would have been implemented.
“I would acknowledge it’s not perfect, but it’s the right thing to do,” said U.S. Rep. Paul Tonko, D-Amsterdam.
Tonko had supported raising income tax rates for earners of $250,000 a year or more. The compromise permanently extended the Bush tax cut rates for couples making less than $450,000 a year. Couples making at least that much saw their income rate go from 35 percent to 39.6 percent, where it was under Bill Clinton.
U.S. Rep. Chris Gibson, R-Kinderhook, who was part of the minority in his conference that supported the package, said he was motivated by the needs of the vast majority of his district.
“I support this bill and voted ‘yes’ as it provides much needed tax relief for over 99 percent of my constituents,” he said in a statement.
Most of the country will be affected by the end to the two-year payroll tax holiday, which had lowered the Social Security tax by 2 percent. That rate goes back up now and will be evident in paycheck withholdings.
U.S. Rep. Bill Owens, D-Plattsburgh, said the return of the higher rate was probably inevitable, as a permanent extension of the lower income tax rates was probably more important for the middle class. He acknowledged, though, that there would be some pain with this increased withholding.
Tonko added that the end of the tax holiday was necessary for the solvency of the Social Security program. When Congress and President Barack Obama deal with the threat of looming program cuts in two months, he said lowering the payroll tax could come up again.
He endorsed that the middle class will be protected by a fix to the alternative minimum tax included in the compromise. This tax, which ensures high-income earners don’t escape paying any taxes as a result of deductions, will now be tied to inflation, so it doesn’t ensnare middle-class earners as their wealth grows.
Sparing millions of New Yorkers from the alternative minimum tax was a relief to state Comptroller Thomas P. DiNapoli, who acknowledged the agreement nonetheless has flaws.
Owens said a major flaw of the bill was that it lacked any significant spending cuts, though it included about $12 billion in cuts split between defense and non-defense spending.
The agreement included an extension of a research and experimentation tax credit that Tonko said was key to the Capital Region’s high-tech economy.
The deal also ensures that doctors who treat Medicare patients will not see a reduction in reimbursement rates.
In a statement on Tuesday night, Obama noted that more deficit reduction is needed in the wake of this agreement, which delays automatic spending cuts for two months.
Moving forward, Gibson wants the Cooper-LaTourette budget, which was inspired by the Simpson-Bowles deficit plan, to serve as the framework for a long-term compromise. He argued that even a modified version of this plan likely has the pro-growth tax policies and serious spending cuts that would get the country on track to stabilize its deficit-spending habits.
“We now have about two months to reach a major agreement to stabilize our deficit,” Gibson said. “We have three opportunities to do so: addressing the [upcoming cuts], the fiscal year 2013 budget and the debt ceiling.”
He added that a new commission or study would not be necessary.
Owens was optimistic about the possibility for a compromise, noting the Republican majority is smaller in the new House than it was in the House that met as a lame duck to pass the tax bill. Democrats will still have the majority in the Senate, but not the filibuster-proof majority enjoyed briefly a few years ago.
Tonko called the initial compromise a good sign, as it signaled to him there are moderate Republicans willing to buck extremists in their party.
Tonko also said the hard tone Obama set during this recent debate is also a good sign. The president has stressed that he doesn’t think the country can simply cut spending to break its cycle of deficit spending.
Also included in the compromise were an extension of unemployment insurance benefits, viewed as a economic stimulator, and a continuation of Obama’s expansion of the Child Tax and Earned Income Tax credits. A tax credit that helps families pay for college tuition, which was authored by Sen. Charles Schumer, D-N.Y., was also extended.
Tax rates will go from 35 percent to 40 percent on estates valued at more than $5 million. Owens called this a success for his district, which has a number of family farms and small businesses that would have been hit if the $5 million threshold had been lowered.
The rate of taxing capital gains and dividends also went up in this deal, with a maximum withholding of 23.8 percent for high-income earners.
The package also restored a provision from 20 years ago that disallows a portion of tax deductions for families with an income of more than $300,000 a year. The Empire Center, a conservative watchdog group, said this change could result in a marginal rate hike of about 1 percentage point.
The compromise, even with all its chaos, controversy and unresolved questions, was enough to ignite the stock market on Wednesday, the first trading day of the new year.
The Dow Jones industrial average careened more than 300 points higher, its biggest gain since December 2011. It’s now just 5 percent below its record high close reached in October 2007. The Russell 2000, an index that tracks smaller companies, shot up to 873.42, the highest close in its history.
The rally multiplied across the globe, with stock indexes throughout Europe and Asia leaping higher. A leading British index, the FTSE 100, closed above 6,000 for the first time since July 2011, at 6,027.37.
In the U.S., the rally was extraordinarily broad. For every stock that fell on the New York Stock Exchange, roughly 10 rose. All 30 stocks that make up the Dow rose, as did 94 percent of the stocks in the Standard & Poor’s 500 index.
U.S. government bond prices dipped sharply as investors pulled money out of safe-harbor investments. And the VIX, the “fear index” that measures investors’ expectations of future market volatility, plunged more than 18 percent to 14.68, the lowest close since October.