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Focus on Regulation

Update on “Fiscal Cliff” Talks

President Obama and congressional Republican leaders continue to negotiate in an effort to pass legislation by year-end that would defer the “fiscal cliff” of higher tax rates and spending cuts scheduled to occur beginning January 1, 2013.

To date, these negotiations have produced little if any progress.  President Barack Obama remains insistent that any deal must increase existing tax rates on taxable incomes exceeding $200k ($250k for married couples).  House Speaker John Boehner (R-OH) has expressed opposition to raising any income tax rates and has promoted revenue increases through closing of loopholes and limiting deductions.  Boehner has also called for entitlement spending cuts to be part of any deal, while President Obama has resisted the inclusion of entitlement cuts.

As time to complete a deal before year-end continues to dwindle, there is increasing talk in Congress of a “break the glass” backup option:  House passage of the Democrats’ tax bill passed by the Senate on July 25, 2012.  This bill, S. 3412, includes extension through the end of 2013 of all Bush (2001, 2003 and 2010) tax rates up to taxable incomes of $200k/$250k; the AMT patch (extended to end of 2012); top dividend and capital gains rates at 20%; the child tax credit; education related benefits; the adoption credit; the American opportunity tax credit; and a few other similar items.  This bill did not include any extension of existing rates/unified credit for estate and gift taxes.

We continue to believe It is more likely than not that President Obama and Republican leaders will reach a deal by year-end that will include a combination of tax increases and spending cuts, perhaps with a framework for broader tax and entitlement reform in 2013.  As we get closer to year-end, however, if there is no sign of any progress on such a deal, we believe there is a good chance that the House may take-up this Senate-passed bill as a “break the glass” option.  In addition to these two scenarios, there are two other possibilities: 1) House and Senate congressional leaders negotiate and pass their own deal which represents a modification of S. 3412; and 2) there is no deal passed in 2012 and the President and Congress return in early January and attempt to pass a bill after the drop off the cliff.  The one significant problem with the latter scenario is that it is questionable whether and for how long after the end of 2012 Congress will be able to retroactively extend the “AMT patch” to prevent a tax increase on more than 28 million middle-income taxpayers, since the AMT patch expired at the end of 2011.