Talks intensified Friday as congressional leaders and President Obama worked to avert a combination of tax hikes and budget cuts scheduled to go into effect Tuesday that economists fear could send the economy into recession.
Amid harsh words Thursday from Senate Majority Leader Harry Reid, D-Nev., and House Speaker John A. Boehner, R-Ohio, Boehner said he would call the House back into session Sunday night. The Senate is already in session.
At the same time, Senate Minority Leader Mitch McConnell, R-Ky. for the first time was engaged directly in talks with the White House. The Washington Post said that “signaled an interest in cutting a deal.”
This apparently marks just the fifth time since the 1930s that members of Congress have been called into a post-Christmas session.
Washington Analysis analyst Joe Lieber cautioned that, in the unlikely event that a deal is reached over the next couple of days, “it will be narrow in scope, and will likely lead to considerable fiscal drag in 2013 (perhaps as high as 2.0 percent to 2.6 percent of GDP).”
In addition, he said he would not expect a debt limit extension to be included in any deal, “meaning that Congress will be facing the issue once again in February, as well as the need for new legislation to fund the federal government near the end of March, when the current funding measure expires.
“Consequently, any stock market relief as a result of a fiscal cliff deal could very well be short-lived as investors shift their focus to the uncertainty ahead,” Lieber said.
CCH, a Wolters Kluwer business and global provider of tax, accounting and audit information, software and services, said that if no agreement is reached and the Bush-era tax cuts fully expire it would increase taxes across the board based on income, and would make an estimated 20 million additional families subject to the alternative minimum tax, raise the capital gains rate and tax dividends as ordinary income.
Moreover, the estate tax would revert to 2001 levels, a $1 million per person exemption and a 55 percent maximum rate.
Currently, the per-person exemption is $5.12 million, with a 35 percent maximum estate tax. And, the estate and gift taxes are combined, a provision that tax practitioners say allows families to buy insurance that could exempt up to $100 million in assets.
According to LOMA, if Congress fails to act, 14.7 million U.S. households would have a potential estate tax liability. (For an example of how the current Democratic and Republican proposals would affect a married couple filing jointly with $150,000 in taxable income, $2,500 in capital gains and $500 in dividends, see chart at right.)
This is a key area of concern for insurance agents who own small businesses. If they want to pass their businesses down to their children, a high tax bill upon death of the agency owner could force the family to sell the business.
Additionally, the child tax credit would be cut by one-half to $500 from $1,000.
"While a deal looked close on several occasions during negotiations, it's been elusive so far," said George Jones, JD, CCH Senior Federal Tax Analyst. "Whether a resolution can be reached before Congress recesses for the year grows dimmer as the days progress."
The fiscal cliff, shorthand for Jan. 1, 2013, when the terms of the Budget Control Act of 2011 are scheduled to go into effect, includes a series of across-the-board spending cuts and tax increases.
"Even if we go over the fiscal cliff, Congress could act early next year to reach a compromise and make any agreement retroactive to the beginning of the year," said Jones. "However, this would not be the ideal scenario for most taxpayers, businesses or investors — most of whom would prefer some degree of certainty heading into 2013."
Republicans are demanding that President Obama take the lead in proposing a solution.
According to Lieber, President Obama's last proposal would:
- Extend tax cuts for those making below $250,000;
- Extend emergency unemployment insurance;
- Patch the alternative minimum tax (AMT);
- Patch the scheduled cut to Medicare physicians ("doc fix"); and
- Avert the sequester.
Lieber said in an investor’s note late Thursday that to get Republicans to support his proposals, Obama would have to move the threshold on taxes to $400,000 or higher before an agreement could be reached, and even then it would still be an uphill battle.
“We continue to believe that any bill that can possibly be voted on in the lame duck session would have to be passed in the Senate first,” Lieber said.
“Reid has stated that he won't bring anything to the floor unless Boehner assures him it will pass the House as well,” Lieber said.
“Any bill brought up in the Senate, however, is still subject to a filibuster, and little prevents even one senator from delaying matters for two days, though an 11th hour agreement is unlikely to be filibustered, in our opinion,” Lieber said.