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Focus on Regulation

Update on “Fiscal Cliff” Negotiations

Congressional leaders and the White House are currently working to come up with solutions to the fiscal train wreck set to take place at the end of this year.  Democrats and Republicans are looking at options to develop a “grand bargain” — including raising taxes and cutting spending.   If the “grand bargain” fails once again to materialize before year-end, as of January 1, 2013, then dramatic across-the-board tax increases and spending cuts will go into effect. These include increasing federal tax rates for all income levels as the Bush tax (2001 and 2003) cuts expire, increases in payroll taxes as the “payroll tax holiday” ends, the exposure of tens of millions of middle-income taxpayers to the Alternative Minimum Tax (AMT) since the AMT “patch” expired in 2011, and the automatic cuts in defense and domestic programs as sequestration takes place in January.

At this point, Congressional staff are reporting that a compromise – if it does happen — will likely include the following: (1) a process or trigger for fundamental tax reform and fundamental entitlement reform, (2) a short term debt limit increase, (3) some modifications to the tax code (extending some tax incentives and removing others), (4) tax rate increases for incomes above $250,000 or $500,000 and (5) discretionary spending cuts to bring both sides together.

This week Senate Leader Harry Reid (D-NV) renewed his call for House passage of a Senate-passed extension (S 3412) of expiring tax cuts for families earning less than $250,000 a year. He noted that passage of the bill has drawn the support of some Republicans, among them Rep. Tom Cole of Oklahoma, a former chairman of the National Republican Congressional Committee. Senate Republican Leader Mitch McConnell (R-KY), on the other hand, said he believes that capping tax breaks for upper-income families, rather than raising rates, would produce sufficient revenue for dealing with the deficit and clinching a deal on the fiscal cliff.  House Speaker John Boehner (R-OH) has also pushed for raising additional revenue through the reducing of tax loopholes instead of raising tax rates on taxpayers with incomes over $250,000.

The President has been holding a series of events this week to build support for his approach to avoid across-the-board tax increases and steep spending cuts in defense and domestic programs and to pressure Republicans to allow tax increases on the wealthy while extending tax cuts for families earning $250,000 or less. The White House has stated that the President will not sign legislation that extends current tax rates to the top 2 percent of income earners, or those households with incomes over $250,000.