On New Year’s Day, almost 24 hours after the deadline had passed, members of Congress approved the American Taxpayer Relief Act that shielded the majority of Americans from the effects of the “fiscal cliff”, which threatened to send the economy back into recession.
The key elements of the fiscal cliff deal are the following:
- Up to an annual income of $400,000 for singles and $450,000 for couples, the deal maintains the 2012 tax rates, while above those levels income tax rates go up from 35% to 39.6%, and dividend and capital gains tax rates go up from 15% to 20%. The deal is a significant concession from President Obama’s proposal during his re-election campaign, which would have had the top tax rate kick in at lower income thresholds, $200,000 for singles and $250,000 for couples, and would have raised more than twice as much revenue as the current deal does. According to the IRS, in 2010 there were over 11,000 tax filers in Hawaii with adjusted income between $200,000 and $500,000, but only about 2,000 tax filers with adjusted gross income above $500,000.
- Personal exemptions and deductions are phased out for incomes over $250,000 for singles and $300,000 for couples.
- The alternative minimum tax, which affected over 11,000 Hawaii tax filers in 2010 and would have affected significantly more middle class families without a fix, is now indexed for inflation.
- Estate tax rates are raised to 40 percent from 35 percent on the value of estates over $5 million.
- Tax credits introduced in the 2009 stimulus law, affecting over 100,000 tax filers in Hawaii, are extended for five years. These include a child tax credit, an expanded earned income credit, and a refundable credit for college tuition. Some business tax credits are also extended for one year.
- The emergency unemployment compensation and extended benefits unemployment insurance programs are extended through January 1, 2014. According to an estimate of the US Department of Labor, about 5,500 unemployed people in Hawaii would have been affected by the discontinuation of these programs.
- The “doc fix” prevents a 27% reduction in payments to Medicare providers for one year.
- The deal also extends some portions of the current farm bill for nine months, but eliminates conservation programs and financing for fruit and vegetable growers and Hawaii’s organic farmers.
- The automatic spending cuts worth $110 billion that were part of the fiscal cliff were delayed for two months, which means that we will almost certainly witness another fiscal cliffhanger very soon. The negotiations will remain contentious in the coming months because they will also involve raising the government’s borrowing limit which we reached on New Year’s Eve. The president has indicated that he does not plan to negotiate over the debt ceiling, but Speaker Boehner has already pledged to require spending cuts matching any increase in the debt ceiling.
- The deal is being characterized as one aimed at “stopping taxes from going up on middle class families,” but in fact the expiration of the 2% social security payroll tax holiday means that employees will see 6.2% instead of 4.2% witheld from their paychecks on their first $113,700 of income. Based on 2010 IRS data, the increase in payroll tax will affect over 500,000 tax filers in Hawaii.
The deal as it stands does almost nothing to solve the long term fiscal problems the country is facing. The threat of the fiscal cliff was supposed force lawmakers to a grand bargain that effectively deals with the long term national debt. Earlier proposals by President Obama and Speaker Boehner included hundreds of billions more in deficit reduction, with Mr. Obama favoring increased taxes on the wealthy and Mr. Boehner favoring spending cuts.
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The impact of the deal on federal revenues depends on what it is compared to. If it is compared to going over the fiscal cliff, the Congressional Budget Office estimates that the deal reduces government revenues by almost $4 trillion over 10 years. If it is compared to an extension of the 2012 tax policies, then the deal raises $620 billion in new revenues over a decade. But that amount does little to eliminate our annual trillion dollar deficits.
– Peter Fuleky