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Congress Passes Deal to Thwart Fiscal Cliff - But Only Temporarily

Jan 02, 2013

A day after allowing the U.S. to technically fall over the fiscal cliff, Congress finally passed a deal to extend income tax cuts for middle-class Americans, which are seen as crucial for preserving the post-recession recovery. But will the measure be enough to revive business confidence?

Just before 11 p.m. ET on Tuesday, the Republican-controlled House of Representatives approved, by a margin of 257-167, the belated fiscal cliff package drafted by the Senate and passed on early Tuesday morning by the upper chamber. President Barack Obama is expected to sign the bill and avert the country from going off the cliff.

Still, the measure, passed by a lame-duck Congress that will turn over on Thursday, was far from the "grand bargain" of widespread fiscal reforms that had been hoped for, solving only the central tax issues that were hotly contested between Democrats and Republicans over the past several weeks leading up to the cliff deadline, while temporarily postponing the preset, automatic federal spending cuts for two months - the so-called sequesters on domestic and, importantly for manufacturers, military and defense spending.

The scaled-down deal sets up more potential cliffhangers for late February or early March, when the new Congress will need to grapple with the $16.4 trillion federal debt ceiling - the maximum amount of money the U.S. government is allowed to borrow - which was reached on Dec. 31, as well as come up with measures to drastically cut spending and close the massive federal budget deficit.

The emergency legislation prolongs the Bush-era tax cuts for Americans and small businesses making below $400,000 annually and extends long-term unemployment benefits - which had formally expired on Dec. 29 - for another year.

Importantly for manufacturers, the deal also renews the R&D tax credit, a production tax credit for developers of wind projects and a measure permitting bonus depreciation. (Forbes describes the fiscal cliff deal's impact on small business more thoroughly, while a CNN report lists the deal's provisions.)

With only two session days left, and facing pressure to strike a deal before the first 2013 openings of Wall Street markets, House lawmakers passed the Senate version of the H.R. 8 bill in order to avoid throwing fragile U.S. economic confidence and weakened business investment into a tailspin and sending the country back into recession. Consumer spending drives 70 percent of the U.S. economy, and economists had made dire warnings about what would happen if the nation fell over the cliff, predicting, among other things, a return to a 9-percent unemployment rate.

The literally 11th-hour passage was ultimately a compromise for the ideologically divided Republicans and Democrats, as President Obama allowed the income tax threshold to move up from the $250,000 he had vowed to push through, while the GOP relented from its stance on continued across-the-board tax breaks, including those for top income earners. In a statement made following the bill's passage, Obama said his goal of preserving middle-class tax cuts and changing the code to raise taxes on the "2-percent wealthiest Americans" had been accomplished. "Ninety-eight percent of Americans and 97 percent of small businesses will not see their taxes go up. Companies will continue to receive tax credits for research," the president said.

The tax hikes on upper-income earners would raise roughly $600 billion in new revenues over 10 years, according to reports. But the non-partisan Congressional Budget Office reported that the fiscal cliff deal will add $4 trillion to the federal budget deficit over the same time period, barring additional measures to raise more revenues and lower spending.

The deal ended a weeks-long stalemate in Washington, at least temporarily, and capped off a suspenseful, roller-coaster New Year's Day in which House Republicans spent the entire day wrangling over passing the "clean bill" overwhelmingly approved by the Democrat-controlled Senate or amending the proposal by affixing a $300 billion spending-cut package to the bill. After holding two caucus meetings, House Republicans finally decided to put the unaltered Senate legislation on the House floor for an "up-or-down" (yes or no) vote. Eight-five Republicans voted yes, while 151 voted against; the vast majority of House Democrats on the roll call (172 out of 188) voted yes.

Reports earlier in the day characterized House Republicans as being deeply unsatisfied by the lack of spending cuts in the Senate package, but had they taken up an amended proposal, it would have required sending the bill back to the Senate for a vote again. This would have likely killed the bill and guaranteed the country's fall over the cliff as the Senate had adjourned after passing the proposal by a 89-8 vote just hours into Tuesday and was unlikely to reconsider any House amendment on the eve of the swearing-in of a new Congress.

Political insiders widely observed that such a move was too risky for House Republicans, who would have been blamed for their inability to act and reach a deal, as well as for any negative economic consequences that would have resulted. Moreover, the advantage in forthcoming fiscal negotiations shifts to the GOP, now that the tax issue is out of the way and spending cuts and entitlement reforms become the main battleground issues.

"Now the focus turns to spending," House Speaker John Boehner (R, Ohio) said. "The American people re-elected a Republican majority in the House, and we will use it in 2013 to hold the president accountable for the 'balanced' approach he promised, meaning significant spending cuts and reforms to the entitlement programs that are driving our country deeper and deeper into debt."

Whether this first fiscal cliff deal revives weakened capital investment and hiring among concerned U.S. manufacturers and businesses remains to be seen in the weeks to come, as the future of defense spending and other budgets is still uncertain despite the delay in $110 billion in automatic sequesters. Many companies, especially those in sectors that rely on government contracts and funding, are hanging in the balance and will likely continue to operate in a holding pattern until the budget and federal borrowing picture is resolved, presumably, two months from now. Washington observers are expecting there will be even more bitter battles on Capitol Hill over the spending and debt cliffs.

"I think we all recognize this law is just one step in a broader effort to strengthen our economy," Obama said in his post-deal remarks. "Unfortunately, there just wasn't enough support or time for that large agreement... We are continuing to chip away... step by step."