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Fiscal cliff part 2 coming in late February

January 1, 2013 by NCC Staff


The Senate and the House have passed a compromise bill on the fiscal cliff, averting tax hikes for many Americans. But there’s more drama coming in February, since the bill dodged two big issues.

The House passed the bill on Monday night, before a new set of lawmakers convenes the 113th Congress. The Senate version of the compromise bill was passed in the early hours of New Year’s Day.

Among the eight senators who voted no were three leaders associated with the tea party (Mike Lee, Marco Rubio, and Rand Paul) and Democrats Tom Carper and Tom Harkin.

The House version passed by a vote of 257 to 167, with Speaker John Boehner and Budget chair Paul Ryan voting in favor of the compromise.

The bill includes a tax hike on families making more than $450,000 a year, extensions of unemployment benefits, the death of the Alternative Minimum Tax, no hikes in milk prices, and various tax measures.

The showstopper was the fate of about $100 billion in spending cuts called the sequestration. The compromise pushes back the sequestration deadline by two months, which is the same time the nation’s debt ceiling is expected to be hit.

So in two months, the new, equally partisan Congress will need to tackle two of the biggest issues that made the fiscal cliff such a big economic and political problem.

A third factor will be the issue of tax reform, which is dear to House Speaker John Boehner as a way to fix the nation’s long-term borrowing issues.

The compromise bill is important because it showed the Senate could reach an agreement on something significant, like taxes.

But fiscal cliff part 2 in late February will be the big showdown between Democrats and Republicans—if the House approves the bill negotiated by Vice President Joe Biden and Senate Minority Leader Mitch McConnell.

Some Republicans will demand significant spending cuts to social programs like Medicare, Medicaid, and Social Security as a tradeoff for accepting tax increases.

Their leverage will be an extension of the debt ceiling, which caps how much money the government can borrow to stay in business. And House Republicans will demand that guarantees about tax reform will be met by Democrats.

Markets reacted badly in the summer of 2011 when Congress deadlocked on those issues, and the fiscal cliff was part of the pact to extend the debt ceiling.

The debate about Social Security in recent weeks has centered on cost-of-living allowances.

But Medicare, Medicaid, and parts of the Affordable Care Act will be in the mix as Congress and the White House debate spending cuts into early March.

President Obama made it clear in recent comments that revenues from tax reform should go to pay for entitlement spending, which is not exactly what fiscal conservatives want--or would vote for in two months.

In August 2011, when Congress hammered out the debt-ceiling compromise, Standard & Poor’s issued its first-ever downgrade of the United States’ sovereign debt.

Two other agencies, Moody’s and Fitch, warned late last year that another debt downgrade was possible if the all of the fiscal cliff issues weren’t resolved.

The two groups didn’t join S&P in the 2011 downgrade.

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