Fiscal cliff deal stops many tax hikes, but leaves big issues pending

January 2, 2013: 10:53 AM ET
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Extending Bush-era tax cuts and patching the AMT will mute some of the biggest fiscal drag. But the deal does not address debt ceiling or tax reform and sets a new deadline for sequester.
NEW YORK (CNNMoney)

The fiscal cliff compromise approved by the House late Tuesday will mute much but not all of the negative economic impact of going over the cliff.

Most prominently, it will extend the Bush-era tax cuts for the vast majority of Americans and spare tens of millions from the Alternative Minimum Tax.

But the deal, crafted over the long weekend by Vice President Joe Biden and Senate Minority Leader Mitch McConnell, also leaves a range of big issues unaddressed.

For instance, when and how will lawmakers raise the country's debt ceiling? From all indications, the coming fight in February could be ugly.

The legislation also creates a new cliff deadline over spending cuts around the same time the debt ceiling will need to be raised.

And what about real tax and entitlement reform? Both are key to long-term deficit reduction, but neither are included in the compromise proposal.

Why I voted against the fiscal cliff deal

Instead, the Biden-McConnell compromise will:

Make most Bush tax cuts permanent: The Bush-era income tax rates will be permanently extended for all income up to $400,000 ($450,000 if married). Bush tax cuts that apply to income above those levels will expire.

Effectively that means for households above those thresholds, their top rate will rise to 39.6%, up from 35% in 2012.

Plus, the capital gains and dividend tax rates for these high-income households will increase to 20% from 15%. For everyone else, investment tax rates will remain at 15% or below.

The compromise bill would also preserve the expanded parameters for the American Opportunity Tax Credit, the Child Tax Credit and Earned Income Tax Credit for 5 more years.

Permanently protect the middle class from the AMT: The bill will permanently adjust the income exemption levels for the Alternative Minimum Tax for inflation.

Most immediately, the measure will prevent close to 30 million middle-class taxpayers from having to pay the so-called wealth tax for 2012.

Without a patch for 2012 in place soon, the IRS has warned lawmakers that up to 100 million taxpayers may not be able to file their 2012 taxes until late March and their refunds would be delayed.

Passing an AMT patch with an extension of the Bush tax cuts on most income -- which together make up the biggest piece of the fiscal cliff -- would boost real GDP by about 1.25% in fiscal year 2013, according to earlier Congressional Budget Office estimates.

Related: Fiscal Cliff: What's in the deal ... what could have been

Limit tax breaks for high-income households: The Biden-McConnell compromise will reinstate limitations on how much those making $250,000 (married couples making $300,000) may take in itemized deductions and personal exemptions.

Retain key tax incentives for businesses: The bill will extend for two years several tax breaks for businesses, including a production tax credit for developers of wind projects, the research and development tax credit, and a measure allowing for bonus depreciation.

Retains several expired tax breaks for individuals: The compromise bill will extend for one or two years a few "temporary" tax breaks for individuals that regularly are extended. These include an option to deduct state and local sales taxes in place of state and local income taxes; and a deduction for elementary and secondary school teachers for certain expenses.

Permanently extend a more lenient estate tax: The legislation will preserve the current estate tax exemption level of $5.12 million but index it to inflation for future years. And it will raise the top rate to 40% from 35% currently.

Extend benefits for the long-term unemployed: The bill will continue a federal extension of unemployment benefits for one year.

Without it, more than 2 million of the long-term unemployed would have run out of benefits at the end of this year, according to the National Employment Law Project, an advocacy group.

Continuing the benefit extension for one year will cost an estimated $30 billion.

Prevent a cut in Medicare doctors' pay: The Biden-McConnell compromise will prevent a scheduled 27% cut in reimbursement for Medicare services for one year. The so-called "doc fix" will boost the deficit by $31 billion.

Norquist: Long fight ahead on spending

Replace sequester for 2 months: The dreaded sequester -- the automatic and blunt spending cuts to defense and nondefense programs -- will be replaced for two months in 2013.

The two months of cuts will be replaced by $12 billion in new revenue and $12 billion in spending cuts.

It's not clear what Congress will decide to do about the sequester after the two months are up. If left in place for the whole year, the sequester would have reduced spending authority in 2013 by roughly $110 billion.

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