U.S. House will miss 'fiscal cliff' vote deadline
The framework of a deal to avoid the 'fiscal cliff' appeared to be in place Monday, but the U.S. House of Representatives will miss the midnight deadline to avoid wide-ranging tax increases and spending cuts that take effect with the new year.
Democrats and Republicans have agreed to raise tax rates on wealthy families, hike the estate tax rate and extend unemployment benefits for another year, officials familiar with the negotiations said.
But House Republicans notified legislators that the chamber will vote Monday evening on other bills. They say that will be their only votes of the day.
U.S. President Barack Obama and Senate Republican leader Mitch McConnell said Monday they are near a deal, but were still bargaining over whether — and how — to avoid $109 billion in cuts to defence and domestic programs that take effect on Wednesday. Democrats want to put off the cuts for one year and offset the so-called sequester with unspecified revenue.
It remained unclear whether the Senate would vote Monday. Congress could pass later legislation retroactively blocking the tax hikes and spending cuts.
Without a deal, at midnight the U.S. economy will go over the "fiscal cliff" — the term that has been coined to describe the combination of a series of tax hikes set to come into effect on Jan. 1, 2013, just as hundreds of billions worth of government spending programs are due to be clawed back.
Together, experts say it could be a $600 billion jolt to the U.S. economy, enough to push it back into recession as Americans are asked to pay more for their government, and get less for their tax dollars.
At a press conference at the White House, President Barack Obama said "today it appears that an agreement … is within sight, but it's not done."
"There are still issues to resolve but we're hopeful Congress can get it done," he said.
Officials emphasized that negotiations were continuing and the emerging deal was not yet final.
That's not to suggest that whatever in the works is a permanent solution. Obama said he initially hoped the talks could produce a "grand bargain" that would chart a clear course on America's taxation and spending policies for an extended period tax, but said that "with this Congress, it couldn't happen at that time."
"It may be [that] we can do it in stages," Obama said. "We're going to solve this problem instead in several steps."
The proposal in the works would raise the tax rates on family income over $450,000 to 39.6 per cent, the same level as under former President Bill Clinton. Also, estates would be taxed at 40 per cent after the first $5 million, up from 35 per cent to 40 per cent.
Tax credits related to tuition and clean energy companies could also apparently be spared for now. And Unemployment benefits would be extended for one year for Americans "who are still out there looking for a job," Obama said.
Without that extension, two million Americans will lose their benefits early in the new year.
A cut in payroll taxes that has been in effect for two years appears to be off the table, however, which means every American with a job can expect at least a modest tax hike starting in the new year.
A Republican official familiar with the plans confirmed the details described to The Associated Press.
The officials requested anonymity in order to discuss the internal negotiations.
Despite the progress in negotiations, Senate Majority Leader Harry Reid warned that time was running out to finalize the deal.
"Americans are still threatened with a tax hike in just a few hours," Reid said as the Senate began an unusual New Year's Eve session.
Democratic Senator Tom Harkin of Iowa took to the Senate floor after Reid to warn Democratic bargainers against lowering levies on large inherited estates and raising the income threshold at which higher tax rates would kick in.
"No deal is better than a bad deal. And this look like a very bad deal the way this is shaping up," said Harkin.
Urgent talks were continuing Monday afternoon between the White House and congressional Republicans, with longtime negotiating partners Vice-President Joe Biden and Senate Republican leader Mitch McConnell at the helm.
An agreement on the proposed deal would also shield Medicare doctors from a 27 per cent cut in fees and extend tax credits for research and development, as well as renewable energy.
The deal would also extend for five years a series of tax credits meant to lessen the financial burden on poorer and middle-class families.
The deal would achieve about $600 billion in new revenue, the officials said.
4 things to know about the 'fiscal cliff'
1. What is it?
It's the term being used to describe a possible perfect storm of economic calamities that the United States is currently on track to hit in the near future. A series of tax cuts – some of which date back as far as the George W. Bush presidency – are set to expire.
Most of the so-called "Bush tax cuts" were targeted at the ultra-rich, but a payroll tax cut is also set to end, which will mean a two per cent tax hike for all salaried workers. Other tax breaks on things like the alternative minimum tax and the unemployment extension kick in, just as the first round of taxes related to President Obama's health care plan become law.
Add it all up and it's a bigger bill than American taxpayers are used to. That's all happening against the backdrop of a bunch of spending cutbacks coming into effect that the administration agreed to during America's acrimonious debate over raising the debt ceiling. All in all, it's been estimated that as many as 1,000 government programs are on the chopping block.
The increase in tax revenues might be good for Uncle Sam's finances, but the end of those tax breaks is going to mean less money in real people's pockets.
If U.S. consumers start spending less just as government spending also dries up, the fear is that could be enough to push the world's largest economy over the edge and back into recession – hence, going over the 'fiscal cliff.'
"The Fiscal Cliff is – simply put – the biggest tax increase [and] spending cut in history," money manager Leon LaBrecque of investment firm LJPR said recently. "It's a colossal mess."
2. When will it happen?
Unless something changes, January 1st. That's the date when laws that are already on the books dictate all the already mandated tax changes and spending cutbacks go into effect.
There's also America's debt ceiling factoring into the equation. It's hard to tell exactly when it will happen, but experts agree that the U.S. government is going to come near its recently-raised debt ceiling soon, and is going to need lawmakers to come together to agree to raise it again in order to avoid defaulting.
The prospect of a new round of spending concessions coming out of those negotiations has the potential to make a bad situation even worse. Again, the timing is tricky to predict, but there's broad agreement that America is going to be up against its debt ceiling at some point between the end of 2012 and early 2013.
3. What's being done to avoid it?
As the chart above shows, web searches for the term "fiscal cliff" have skyrocketed, a clear suggestion that it's entered the public consciousness.
But beyond a lot of talk, not a lot is actually being done about it yet. With a lame-duck Congress where members who were voted out in the recent election are still in office and newly-elected members who have to deal with the decisions have yet to move in, there's unlikely to be a breakthrough any time soon.
Some people are optimistic that Congress can hammer out a deal between now and the end of the year. As investment guru Dennis Gartman told CBC News in an interview recently, lame-duck Congresses are sometimes very effective because they cut through the partisanship. "They're either utterly useless or a lot gets done," he said.
The good news is that all sides agree something must be done. But the main problem is that none of the obvious outcomes are particularly appealing to anyone. Maintaining the status quo might help the U.S. government slay its deficit, but in the real economy, growth is likely to come to a standstill.
Moving to cancel some or all of the tax measures or spending cuts might be possible, but experts say that would just be kicking the can down the road, to be dealt with later.
4. How would Canada be affected?
As the old saying goes, "when America sneezes, the rest of the world catches a cold" and Canada is especially vulnerable to any shocks from its southern neighbour.
Some 76 per cent of Canada's exports go south of the border, so manufacturers and exporters of all stripes would acutely feel any sort of slowdown in demand from the U.S. economy.
As TD Bank economist Craig Alexander told CBC News recently: "It would wipe out economic growth in Canada."
The Congressional Budget Office estimates the combination of tax hikes and spending cuts will be enough to shave $560 billion U.S. from America's deficit. Ordinarily that might be construed as a good thing, but the CBO also says that would be enough to shave four percentage points off America's GDP.
Given that America's economy is currently expanding at an annual rate of about two per cent, that means the fiscal cliff would be enough to turn small growth into at least a mild recession. Canada can't help but be dragged down by that sort of a slowdown.
As the 'cliff' analogy suggests, the downside to going over the edge is hard to tell at first. But as time goes on, it gets harder to stop the negative momentum once it's started. Making the impact down the line guaranteed to devastate.