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Deal Needs Sign-off From Rank-and-File Democrats

The White House and Senate Republicans have reached a deal on the fiscal cliff — with Vice President Joseph R. Biden Jr. meeting with Senate Democrats to sell the package.

A source familiar with the talks said that both House Minority Leader Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., signed off on the deal Monday. The source said both sides agreed to a two-month delay of the automatic budget sequester offset by a combination of revenues and spending cuts. The offsets will come half from defense and half from non-defense, according to the source.

That could give the next Congress time to find a longer-term solution.

Still, the administration and party leaders may have a hard time lining up rank-and-file members for a deal that includes permanent tax cut extensions at levels well above those President Barack Obama campaigned on, without a long-term fix to the sequester or an increase in the federal debt ceiling.

Senate Minority Leader Mitch McConnell said earlier in the day that recent talks with Biden yielded an agreement to stop tax increases from going into effect at midnight.

The bargain would grant Obama an upper-bracket tax increase he has sought, but with an income threshold higher than he proposed.

McConnell, a Kentucky Republican, called for Senate passage of legislation incorporating those agreements while negotiations continue over how to avoid the sequester’s $109 billion in automatic spending cuts, the other part of the fiscal cliff.

“We all want to protect taxpayers and we can get it done now,” McConnell said. “We can do this. We must do this.”

Although the tentative agreement is subject to change, sources familiar with the negotiations outlined its provisions. The agreement would:

• Permanently extend all the 2001 and 2003 tax rates (PL 107-16, PL 108-27) 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.

• 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.

• Preserve the tax exemption for estates valued under $5 million for an individual and $10 million for a couple while raising the tax rate for estates above that level to 40 percent from 35 percent.

• Permanently set a higher threshold for the alternative minimum tax to prevent it from imposing higher taxes on middle-income Americans. Congress has routinely enacted temporary “patches” to limit the effect of the minimum tax, which was established to ensure that high-income households paid a minimum amount of income tax by excluding some deductions and exemptions. But the threshold for the minimum tax was not adjusted to account for inflation, leaving an increasing number of middle-income taxpayers potentially subject to the tax each year.

• Extend for five years tax credits included in the 2009 stimulus law (PL 111-5). Among them are the American Opportunity Tax Credit that provides up to $10,000 for four years of college, the child tax credit and the earned income tax credit.

• 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.

• 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.

• 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.

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