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cliff Briefing Booklet What to expect when you’re expecting an economic crisis —November 26, 2012—

THE FISCAL CLIFF & the lame duck congress november 2012

Recently, there has been a lot of talk in Washington about the so-called fiscal cliff. Both the speaker of the House, Rep. Boehner, and President Obama have made public remarks about the current economic conditions of the United States and how they can be eased during the lame-duck session.1 Currently, no specific plan has been issued by Congress to address the tax increases and spending cuts that are scheduled for 2013.

WHAT’S IN SIDE Below we look at several issues that Congress could address during the lame-duck session.


compare by party agreements & disagreements 01 graphic


fiscal cliff calendar 03 graphic


fiscal cliff Debt ceiling, sequester spending cuts, and taxes


emergency spending supplemental for hurricane sandy


defense authorization


medicare payment to doctors


Emergency unemployment insurance


farm bill

Where Both Parties Agree and Disagree Boehner How to reform tax code & stimulate the economy “By lowering rates and cleaning up the tax code, we know that we’re gonna get more economic growth. It’ll bring jobs back to America. It’ll bring more revenue.”

Increasing taxes on the wealthiest Americans “The problem with raising tax rates on the wealthiest Americans is that more than half of them, are small business owners. We know from Ernst & Young, 700,000 jobs would be destroyed. We also know that it would slow down our economy.”

According to the president, wh more revenue—from a tax inc wealthiest Americans. This tax help to decrease the budget de will help to keep the economy other hand, the speaker believ

Americans a concerned a & the econo

Obama: “[O]ur top p and growth. That’s th talked about during t

Boehner: “This is ab

number one issue in the economy and job our economy moving to get more America

Washington avoid the fi

Obama: “Right now, come to an agreemen reduction package b everybody’s taxes wi on January 1st—ever 98 percent of Americ $250,000 a year. And

Boehner: “The memb

understand how imp fiscal cliff. It’s why th earlier this year to re other types of cuts, a summer we passed a current tax rates for time to overhaul our

Washington reduce the d

Obama: “The plan I campaign…it’s a plan a balanced and respo

Boehner: “Well, clea

on our economy. And spend money that we

(where both p

hat we need is crease on the x increase will eficit, which y strong. On the ves that it is

more important to improve the way our current tax code functions in order to make it more efficient. A more efficient tax code will bring in more revenue, instead of our current system, which “only collects about 85 percent of what’s due

are most about jobs omy

priority has to be jobs he focus of the plan I the campaign.”

bout the American—the the election was about bs. Everyone wants to get g again. Everyone wants ans back to work again.”

n needs to fiscal cliff

, if Congress fails to nt on an overall deficit by the end of the year, ill automatically go up rybody’s—including the cans who make less than that makes no sense.”

bers of our majority portant it is to avert the he House took action eplace the sequester with and it’s also why over the a bill to extend all of the one year so that we had r tax code.”

n needs to deficit

talked about during the n to reduce our deficit in onsible way.”

arly the deficit is a drag d we can’t continue to e don’t have.”

parties agreed)

the government.”2 In the coming weeks, Republicans and Democrats will debate these different policies and try to find a compromise that will satisfy both parties and improve America’s economic growth.

Obama How to reform tax code & stimulate the economy “Business will know that consumers, they’re not going to see a big tax increase. They’ll know that most small businesses won’t see a tax increase. And so a lot of the uncertainty that you’re reading about, that will be removed.”

Increasing taxes on the wealthiest Americans “If we’re serious about reducing the deficit, we have to combine spending cuts with revenue—and that means asking the wealthiest Americans to pay a little more in taxes. …That’s how we can reduce the deficit while still making the investments we need to build a strong middle class and a strong economy.”

fiscal cliff calendar election day

lame duck sess

01 02 03 04 05


06 07 08 09 10 11 12 13 14 15 16 17 1

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 1

dec Sequestration takes place

U.S. likely to exceed d

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 jan 01

*source: National Journal 2012

sions 11/13-12/31

18 19 20 21 22 23 24 25 26 27 28 29 30

expiring tax policies

19 20 21 22 23 24 25 26 27 28 29 30


debt ceiling*

17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

05 The Fiscal cliff

a closer look at The debt ceiling In August 2011, the president signed the Budget Control Act into law. In exchange for an immediate increase in the debt ceiling—the largest debt ceiling increase in American history—the law laid out steps to reduce the deficit over ten years, although Congress is now considering eliminating some of these spending cuts now.3 Although the debt ceiling is not actually a part of the fiscal cliff, the U.S. government is expected to reach its debt ceiling by mid-January—a few weeks after the tax increases and sequester spending cuts take effect. 4 Even if the debt ceiling is hit by mid-January, the government can take “extraordinary measures” that would buy more time to find a solution. Although the exact time frame is unknown, these measures could buy another month or so. a closer look at sequester spending cuts The Super Committee, set up by Congress when it last raised the debt ceiling in August 2011, didn’t find a way to cut spending, thus triggering a process called sequestration, which takes effect in early January 2013. For 2013, the sequester spending cuts are made by formula. Spending cuts by formula aren’t the best way to cut spending since formulas are unable to respond to changing circumstances and priorities. What is sequestration? By definition, sequestration makes spending reductions to get budget levels in line with spending goals set by law.5 As we are learning now, Congress and the president have the ability to amend the sequestration process triggered by the Budget Control Act.6 Specifically, the cuts triggered by sequestration go into effect in January 2013. There is lots of talk about stopping these cuts, totaling $109 billion for just next year, from taking effect. Approximately half the cuts come from defense spending, with the other half coming from non-defense discretionary spending.

a closer look at Taxes At the end of 2012, many tax policies expire. Although many of these tax provisions are commonly referred to as the “Bush tax cuts,” President Obama extended many of these provisions for two years in December 2010.7 Individual Income Tax Rates In December 2010, President Obama extended the income tax cuts of 2001 and 2003 through the end of 2012.   • Prior to the 2001 law, the tax rates were as follows (with the actual rate depending on what the taxpayer earns): 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent. • Through 2012, the rates are as follows: 10 percent, 25 percent, 28 percent, 33 percent and 35 percent.   As is stands now, these tax rates will reset to the rates before the 2001 law passed at the start of next year.8 Estate Tax Rate • The current rate for the estate tax is 35 percent, with an estate having an exemption of nearly $5 million. (In 2010, the estate tax was repealed— but just for just that year.) • Without action, the rate of the estate tax is set to skyrocket to 55 percent, with the estate exemption falling to $1 million.9 Dividend and Capital Gain Tax Rates A dividend is “a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of shareholders10.” In other words, if an individual owns a stock that pays a dividend, they generally receive a portion of a company’s earnings in cash.


• The current dividend tax rate is 15 percent for most taxpayers.   • Next year, without action, dividends will be taxed as ordinary income so the rate will jump to 39.6 percent.11   A capital gain is “an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price.”12 In other words, if you own stock and sell it at a later date for more than you purchased it for, the difference is a capital gain. • The current capital gains tax rate is between 15 percent and 5 percent, with the rate depending on how much income you earn. • Next year, without action, the capital gains tax rate will increase to a rate between 20 percent and 10 percent.13 Social Security Payroll Tax Holiday In December 2010, Congress created a “temporary” measure that reduced what employees pay in Social Security taxes. In February 2012, this provision was extended through the end of 2012.14 Currently, employees pay 2 percent less in Social Security payroll taxes than what is traditionally paid. If this provision expires it “means low-income workers will pay several hundred dollars more than they’re paying now, while high-income workers will pay roughly $2,340 more.”15   Since this “temporary tax holiday” has been extended more than once, it could be extended again. Tax Extenders Many tax extenders provisions expired at the end of 2011. Some of these provisions may not be renewed but many are likely to be. The research and development tax credit, for example, is likely to be extended. These expiring provisions generally “fall into a group of tax deductions, credits and provisions—now known as ‘extenders’—which Congress has repeatedly renewed, but never makes permanent, simply because it doesn’t want to acknowledge their true costs.”16   

As a point of reference, the last time Congress addressed the tax extenders issue, it retroactively passed it as well.17 Alternative Minimum Tax (AMT) In 1969, Congress created the AMT as a separate tax system. The stated goal of the AMT was to make sure the wealthiest Americans owed some income taxes. In 1967, the Treasury secretary reported 155 people with incomes more than $200,000 owed no income tax because they were able to use tax code deductions and credits to bring their tax liability to zero. The AMT isn’t indexed for inflation, which means more and more middle class families now fall under the AMT.18  To limit the impact of the AMT, Congress traditionally passes a “patch.” “Patching” means raising the income level automatically exempt from the AMT, usually for one year or two. For 2011, the AMT exemption for a single person is $48,450.19 Like tax extenders, the AMT is not permanently addressed because Congress simply doesn’t want to acknowledge its true cost. According to the independent Joint Committee on Taxation, the AMT patch for 2010 and 2011 is estimated to reduce revenue to the federal government by nearly $137 billion over 10 years.20   Currently, there is no patch for the AMT for 2012, so “all taxpayers can do is wait for Congress to approve another patch.”21

09 emergency spending SUPPLEMENTARY FOR HURRICANE SANDY According to The Hill: “[T]he changes of the lame duck Congress dealing with a fight over added spending for Hurricane Sandy appears to be increasing.”22 Supplemental appropriations provide additional funding in a current fiscal year that Congress considers too urgent to wait.23 In recent years, it has been common for Congress to pass an emergency supplemental after a major disaster strikes.

According to Politico: Congressional Democratic and Republican aides say that talk of additional funding for hurricane relief is–so far–premature. FEMA’s disaster relief fund is sitting on $7.8 billion that can be spent right away, and lawmakers can tap billions in additional aid without needing another funding bill.24

Defense authorization

In theory, all spending is supposed to be authorized before Congress can appropriate the money. It doesn’t always work out that way. Authorizing legislation “authorizes the appropriation of funds to implement laws.� While not all bills are regularly authorized, the defense bill is generally an exception.25

According to The Hill: The defense authorization bill typically has days of robust debate on everything from Guantanamo detainees to social issues in the military, with hordes of votes on sometimes-controversial amendments.26 However, with the defense authorization left for the lame-duck Congress, there is very little floor time to have days of debates.

11 medicare payment to doctors

In an effort to reduce the budget deficit in 1997, Congress passed the Balanced Budget Act. This law outlined a “sustainable growth rate” (SGR) for Medicare payments to doctors. SGR restricted doctors’ reimbursements for certain Medicare payments.27 Specifically, the law limited the reimbursement to doctors so “total pay for physicians could not exceed the growth rate of the rest of the economy.”28  However, SGR hasn’t been implemented as the law scheduled it to be. Congress routinely blocks the SGR formula on a “temporary basis.” The current block lasts until the end of 2012.29 Why does Congress only enact temporary fixes? Because it “costs” too much to eliminate the SGR on a permanent basis. Therefore, Congress prefers blocking SGR on a short–term basis. Click here if you’d like to see a visual history of the SGR.

Emergency unemployment insurance Unemployment insurance is distributed jointly by federal and state governments. Before the recession, a person in a state with low unemployment generally could receive unemployment benefits for about 26 weeks. Because of the recession, the 2009 stimulus bill extended this benefit for up to 99 weeks.30 (The amount of time a person can be on unemployment varies from state to state.) Today someone can be on the program for up to 73 weeks—down from the high of 99 weeks. This extension last until January 2013.31


Federal subsidies to farmers began after the Great Depression. Lawmakers then viewed safeguarding agriculture as a national security priority.32 But today the U.S. debt has increased nearly 53 percent since 200933 and farm incomes are surging to record levels.34 In general, a new farm bill is passed about every five years.35 The last farm bill became law in 2008 despite a presidential veto.36 Certain provisions of the last farm bill expire at the end of this month.37 According to the nonpartisan Congressional Research Service, farm bills have “steadily grown� over the last few decades as coalitions with varying interests horse trade to try to get what they want in the bill.38 The last few farms bills have either added new crops to the subsidy list or created entirely new programs. Since the last farm bill will expire while Congress is on recess, it is likely this is addressed during the lame duck. (For more on the farm bill, see our fact sheet.)

counting down the days

So there you go. No matter how you slice it, waiting until after the election— with only about 20 legislative days on the calendar to actually do work.

1 Washington Post. House Speaker John A. Boehner’s remarks on the fiscal cliff at news conference on Nov. 9, 2012 (Full Transcript). November 9, 2012. politics/house-speaker-john-a-boehners-remarks-on-the-fiscal-cliff-at-news-conference-on-nov-9-2012transcript/2012/11/09/292b9dec-2a8b-11e2-bab2-eda299503684_story_2.html; Boston. Transcript of President Obama’s remarks on the economy, fiscal cliff. November 9, 2012. news/nation/washington/2012/11/09/transcript-president-obama-remarks-the-economy-fiscal-cliff/ SqGiKBKS3p8aw3LZ1J7QkM/story.html 2 Washington Post. House Speaker John A. Boehner’s remarks on the fiscal cliff at news conference on Nov. 9, 2012 (Full Transcript). November 9, 2012. politics/house-speaker-john-a-boehners-remarks-on-the-fiscal-cliff-at-news-conference-on-nov-9-2012transcript/2012/11/09/292b9dec-2a8b-11e2-bab2-eda299503684_story_2.html 3

FactCheck.Org. Dueling Debt Speeches. July 27, 2011.

4 The Wall Street Journal. U.S. Appears Set to Hit Debt Ceiling in January. October 15, 2012. http:// 5 Congressional Research Service. Budget Sequesters: A Brief Review. March 8, 2004. P. 2. http:// 6 Congressional Research Serivice. The Budget Control Act of 2011. August 19, 2011. P. 27. http:// 7

CQ House Action Reports. 111-38. Subscription required.


CQ House Action Reports. 111-38. Subscription required.


CQ House Action Reports. 111-38. Subscription required.

10 Investopedia. Definition of ‘Dividend.” asp#axzz1wYQU2Af3 11

CQ House Action Reports. 111-38. Subscription required.

12 Investopedia. Definition of Capital Gain. asp#axzz1wYQU2Af3 13

CQ House Action Reports. 111-38. Subscription required.


CQ House Action Reports. 112-4. Subscription required.

15 CNN Money. Countdown to tax hike. December 21, 2011. news/economy/payroll_tax_cut_impact/index.htm 16 Forbes: Dozens of tax breaks set to expire on Dec. 31. janetnovack/2011/12/02/dozens-of-tax-breaks-set-to-expire-on-dec-31/. 17

CQ House Action Reports. 111-38. Subscription required.

18 Tax Foundation: Backgrounder on the individual Alternative Minimum Tax. May 24, 2005. http:// 19 SmartMoney. The AMT. February 3, 2012. 20 Fact Sheet 111.38. Subscription required.

21 CNBC. AMT to Hit Record Number of Taxpayers this Year. April 2, 2012. id/46903302/AMT_to_Hit_Record_Number_of_Taxpayers_This_Year 22 The Hill. Key Democratic senator pushing for Sandy supplemental spending bill. November 4, 2012. 23 Congressional Research Service. Supplemental Appropriations: Trends and Budgetary Impacts since 1981. November 2, 2005. Summary. 24 Politico. Congress may need to step in on Sandy aid. November 1, 2012. news/stories/1112/83187.html 25 Department of Defense. Washington Headquarter Services. Budget 101: Authorization vs. Appropriations. Accessed November 13, 2012. 26 The Hill. Republicans wary about time squeeze on defense bill. September 23, 2012. http://thehill. com/blogs/defcon-hill/budget-appropriations/251081-republicans-wary-about-time-squeeze-on-defense-bill 27 Congress Research Service: Medicare Physician Payment Updates and the Sustainable Growth Rate System. August 6, 2010. Summary. 28 The Fiscal Times: Is There a Doctor Fix in the House…and Senate? November 23, 2011. http://www. 29

CQ House Action Reports. 111-38. Subscription required.

30 The New York Times: How Unemployment Benefits Became Twice as Generous. November 2, 2011. 31

CQ House Action Reports. 112-4. Subscription required.

32 CQ House Action Reports. 110-7. Subscription required. ldXRDRDVoeHB2SzhPM0NoV3kxZw 33 Calculation from Table 1.1—Summary of Receipts, Outlays, and Surpluses or Deficits, 1789 – 2017. 34 Congressional Research Service. Farm Safety Net Proposals in the 112th Congress. April 18, 2012. P. 6. 35 Congressional Research Service. What is the “Farm Bill?” January 3, 2011. P. Summary. http:// 36 CQ House Action Reports. 110-7. Subscription required. ldXRDRDVoeHB2SzhPM0NoV3kxZw 37 Congressional Research Service. Farm Safety Net Proposals in the 112th Congress. April 18, 2012. P. Summary. 38 Congressional Research Service. Previewing the Next Farm Bill. February 15, 2012. P. Summary.

For more information on the facts that affect your pocketbook, visit us at: [published November 26, 2012]

Fiscal Cliff Briefing Book