Washington's Fiscal Deal A Bad Deal for Working Class?

The "Fiscal Cliff" deal brokered by the Obama administration and Congressional leaders passed the House and Senate, avoiding the over-hyped "fiscal cliff."  While the corporate mainstream media, and Wall Street cheered the deal, progressives have expressed concerns about where the deal leads the negotiations over the debt ceiling and federal budget.  Republicans are perceived as having lost this round, but they got 98% of the Bush Tax cuts made permanent, loosing over $200 billion in tax revenue, and they now insist the next round will be focused on cutting "entitlements," i.e., Social Security and Medicare.  Unless enough revenue can be made up in "tax reform" (closing loopholes, or new taxes on dividends and stocks (Financial Transaction Tax), most of the deficit reduction will come out of Medicare and Social Security.

Progressives did get some things we wanted, like extension of unemployment benefits and the Earned Income Tax Credit and Child Tax Credits.  And taxes on some of the rich did go up for the first time in 20 years, but more tax revenue is needed to avoid deeper cuts in social programs.

So now the progressive/left must prepare to fight the Austerity Bandwagon.  We must insist on NO CUTS to Social Security and Medicare BENEFITS.

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Here's a summary of the Deal from the Coalition for Human Needs

What Congress Enacted:

You've seen the press accounts.  First the Senate voted 89-8 in favor of The American Taxpayer Relief Act of 2012 in the wee small hours of New Year's Day.  Then, after a flurry of opposition by House Republicans, including Majority Leader Eric Cantor (R-VA), the House Republican caucus took stock to see if they would have the votes to add a package of more than $300 billion in spending cuts to the Senate bill, although with only hours left to this Congress, it was clear that making such a change would doom the bill.  The House Republicans decided not to go there, and voted late on January 1 on the Senate bill unamended.  The bill passed 257-167, with 85 Republicans joining 172 Democrats in favor, and 151 Republicans and 16 Democrats voting no.  The President will sign the bill.

The bill raises about $620 billion in new revenues over the next 10 years (maybe $750b counting interest savings), and provides few spending cuts.  President Obama, although preferring a bigger deal with more revenue and a comprehensive replacement of the across-the-board cuts, makes the point that we are making deficit reduction decisions in stages.  Stage 1:  the initial $1.5 trillion in spending cuts (to appropriations including education, housing, community services, energy, environment, etc., as well as the Pentagon).  Stage 2:  what just passed; almost all revenue, but the new revenues are only about half the size of the spending cuts in Stage 1.  Stage 3:  what comes next - which could be another $1 trillion or so.  We strongly agree with the President that whatever savings come next must have a very substantial new revenues component, beyond what was just passed.  House Republicans want more spending cuts, but ix-nay on the axes-tay.

What to think about all this:  

It is very welcome that the unemployed and low- and middle-income families were helped and that harmful service or benefits cuts were largely avoided.  But the new revenues are simply inadequate to the task of long-term deficit reduction.  Because the debt ceiling was not raised, and is expected to get to crunch time by the end of February, the next round of replacing the sequestration (across-the-board) appropriations cuts will be decided in the midst of House proposals to tie increases in the debt ceiling to spending cuts. 

Over the next two months, we must work hard to emphasize and re-emphasize the harmfulness of cuts to programs that would be subject to sequestration - Head Start, housing, WIC, education, training, community services, LIHEAP, so much more - as well as the harm from cuts to Medicaid, SNAP/food stamps, Medicare, or SSI, all of which are threatened.  We must also include in our messages that it would be the height of recklessness for some in Congress to tie the increase in the debt ceiling to damaging service cuts.  As the President has rightly pointed out, the debt ceiling must rise to pay for expenses Congress has already "racked up."  Threatening to take us over this new cliff is grossly irresponsible, and we must add to a loud clamor against such threats. 

Details about the new bill:

• Unemployment Insurance:  The federal Emergency Unemployment Compensation program for long-term unemployed was extended for 1 year, sparing 2 million jobless people from going without benefits starting at the beginning of January, and 5 million people by the end of the year.  Very good news.
• New Revenues:  $620 billion over 10 years, far less than the President's previous proposals of as much as $1.6 trillion.
  • Income tax rates go up permanently for individuals with incomes above $400,000 and joint filers with incomes above $450,000.
  • Restoration of Clinton era limits on income tax personal exemptions (start phasing out on income over $250,000) and on itemized deductions (start phasing out on income over $300,000).
  • Capital gains and dividends taxed at 20 percent rate, up from 15 percent.
  • Payroll tax cut is allowed to expire (will rise from 4.2 percent to 6.2 percent starting this month).  This cost $120 billion a year; so ending it will take that out of people's incomes, costing a $50,000 earner about $83 a month.
• Estate Tax:  Although the rate rises from the current 35 percent to 40 percent, the exemption level for estates stays at $5 million for individuals/$10 million for couples, and is indexed for inflation, so will rise to $15 million in 2020.  Estimated to maintain most of the current extremely generous estate tax break.  The President had sought to reduce the exemption levels and rate to its 2009 level ($3.5 million/$7 million, 45 percent).  Big disappointment.
• Tax Reductions:
  • Below income levels listed above, everyone retains current law tax rates permanently.
  • Low-Income Tax Credits:  the improvements in the Child Tax Credit, Earned Income Tax Credit, and college American Opportunity Tax Credit that were enacted in 2009 are extended for 5 years.  Excellent that they are continued; distressing that they were not made permanent like the other income tax provisions.
  • Business and individual tax breaks extended for 1 year:  These, nicknamed the "extenders," are generally renewed each year, including Research and Development credits, housing credits, low-income worker hiring credit, investment credits, etc.; also deductions for individual taxes for state and local sales tax, tuition, teacher expenses, etc.  Includes energy tax credits.
  • Permanent fix for Alternate Minimum Tax (AMT), to prevent middle class households from being subject to the higher AMT.
• Sequestration (across-the-board) cuts delayed two months.  Costs $24 billion, with $12 billion from new revenues (higher taxes in the short-run from transfers by individuals from regular IRA's to Roth IRA's, but which would lose revenues in the long term), and $12 billion evenly split between Pentagon and domestic appropriations cuts, not yet specified, but spread over FYs 2013 and 2014.
• Medicare Physician Payments:  The "doc fix" is extended for a year (preventing the Sustainable Growth Rate, or SGR, from being reduced, saving physicians a 26.5 percent reduction in their Medicare payments.  Costs $30 billion, paid for by reducing payments to hospitals, including Disproportionate Share hospitals that serve uninsured patients.
• Tax Refunds Disregarded in Calculating Eligibility or Benefits for Means-Tested Programs:  existing provision made permanent.  (Disregarded as income; also disregarded as resources for one year.)
• Transitional Medical Assistance extended for a year.
• Farm Bill extended through September.  SNAP mostly untouched, except for nutrition education program cut in 2013.

Want more detail?  See Congressional Budget Office analysis; Joint Committee on Taxation analysis.