January 2013 Special Edition Washington Report: "Fiscal Cliff"

January 2, 2013

January 2, 2013.  Late last night, the U.S. House of Representatives voted to go along with legislation previously passed by the U.S. Senate to avert the so-called “fiscal cliff” of tax increases and spending cuts otherwise scheduled to come into effect on January first.  The legislation, H.R.8, a copy of which is viewable here: 

http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf includes the following provisions:

— Income tax rates will permanently rise to Clinton-era levels for families with income above $450,000 and individuals above $400,000. All income below the threshold will permanently be taxed at Bush-era rates.

— The tax on capital gains and dividends will be permanently set at 20 percent for those with income above the $450,000/$400,000 threshold. It will remain at 15 percent for everyone else. (Clinton-era rates were 20 percent for capital gains and taxed dividends as ordinary income, with a top rate of 39.6 percent.)

— The estate tax will be set at 40 percent for those at the $450,000/$400,000 threshold, with a $5 million exemption. That threshold will be indexed to inflation, as a concession to Republicans and some Democrats in rural areas like Sen. Max Baucus (D-Mt.).

— The sequester (mandatory across the board federal spending cuts) will be delayed for two months. Half of the delay will be offset by discretionary cuts, split between defense and non-defense. The other half will be offset by revenue raised by the voluntary transfer of traditional IRAs to Roth IRAs, which would tax retirement savings when they’re moved over.

— The pay freeze on members of Congress, which President Obama had lifted this week, will be re-imposed.

— The 2009 expansion of tax breaks for low-income Americans: the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit will be extended for five years.

— The Alternative Minimum Tax will be permanently patched to avoid raising taxes on the middle-class.

— The deal will not address the debt-ceiling, and the payroll tax holiday will be allowed to expire.

— Two limits on tax exemptions and deductions for higher-income Americans will be reimposed: Personal Exemption Phaseout (PEP) will be set at $250,000 and the itemized deduction limitation (Pease) kicks in at $300,000.

— Federal unemployment insurance will be extended for another year, benefiting those unemployed for longer than 26 weeks. This $30 billion provision won’t be offset.

 (Thanks to the Washington Post’s Wonkbook and Suzy Khimm for the details of the above summary.)

And, as Zachary A. Goldfarb of the Washington Post notes:  “Despite the tentative agreement reached late Monday to avoid much of the fiscal cliff, many Americans will see a higher tax bill because of the expiration of the payroll tax cut, which was enacted in 2011 as a temporary measure to boost economic growth. The tax holiday was preceded by a similar temporary cut in 2009 and 2010.

“The deal negotiated by Vice President Biden and Senate Minority Leader Mitch McConnell (R-Ky.) and approved by the Senate early Tuesday addresses a separate tax — the income tax — and would prevent tax rates from increasing for all but the wealthiest Americans. But both sides have decided to leave the payroll tax out of the agreement.

“Unlike income taxes, which rise along with a worker’s income, the payroll tax is a fixed percentage of an employee’s salary. Allowing the tax cut to expire increases taxes on salaries by 2 percent for every American worker. Up to $110,100 a year in salary is subject to the tax.

“This jump in payroll taxes, combined with other tax increases affecting the very wealthy as a result of the deal, would make for the largest increase in taxes in about half a century.”

And, as mentioned above, we need to remember that the federal debt ceiling and mandatory spending cuts known as sequestration (separate issues from the fiscal cliff) have been simply punted down the road for another two months.  We can expect the same exact posturing, fights and gridlock in two more months’ time. 

The bottom line for law enforcement:  As middle class wage earners, last night’s deal offers protection from several, but not all, tax increases.  Also, the continued threat of budget sequestration means that many federally funded law enforcement programs remain at risk.

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