Fiscal compromise sets stage for new year of mini-cliffs

Tom Shoop

This article has been updated.

My, my, how far lawmakers’ ambitions for the fiscal cliff negotiations have fallen in the past two weeks.

Aiming to pull the country back from the fiscal cliff, the Senate early Tuesday easily approved a measure that would delay automatic budget cuts known as the "sequester" and raise taxes on household income above $450,000. The deal, worked out between the White House and Republican Senate Minority Leader Mitch McConnell, still needs approval by the House.

The measure is a small-bore compromise on a huge array of tax and spending issues that had deadlocked Washington for months. If it passes the House, financial markets will breathe a sigh of relief and the action by politicians could combat a growing perception that they favor  ideology over the economy's health.

In addition to delaying the across-the-board spending cuts and agreeing to some tax hikes, the deal would also permanently patch the alternative minimum tax; extend business tax breaks for one year; increase the rate on capital gains and dividends to 20 percent for families that earn more than $450,000; increase the estate tax from its current levels; and extend President Obama's 2009 stimulus tax credits for five years for college students, families with children and low-income families.

In the coming days, the Democrats will bill the deal as a historic win for the party by saying it broke the Republicans' no-new-tax orthodoxy. That is true, but the small-scale deal poses its own problems over the long run for the White House and congressional Democrats.

Sure, the deal extends the middle class tax cuts permanently, but part of that extension involves accepting a huge swath of the Bush administration's tax policy legacy. The deal also defines the wealthy as those who earn close to half a million a year. That's hardly a tax just to benefit the middle class. Even high-income earners in expensive states like New York or California would be hard-pressed to define anyone making $395,000 as just another hard-working Joe.

That’s a huge political victory for the Republicans because it ensures that the Bush-era cuts have become part of our accepted reality.

“This is now part of the tax code,” says Roberton Williams, a senior fellow at the Tax Policy Center. “Any change in taxes is now measured relative to that.”

The package also does not raise as much revenue as the White House had proposed (just $600 billion to the administration's original request of $1.2 trillion). The small-scale deal in play does little to boost economic growth because the package does not contain stimulus money and quietly does away with the payroll tax holiday. Nor does not it streamline the tax code, the pet project of the business lobbyist groups, or deal with the deficit in a meaningful way, as the Wall Street Journal aptly laid out.

The biggest takeaway is that the package shoves many of the tough decisions about long-term tax and spending policy into January and February, when lawmakers will face not only the debt ceiling but also the sequester: a moment that Republicans view as ripe for an overhaul of entitlement programs. And, they're right to anticipate that this will be a time when the Democrats will give ground on spending cuts and potentially the social safety net.

The clock already has started ticking on that fight, even though the fiscal cliff saga is not even over yet. Treasury Secretary Timothy Geithner announced last week that the federal government would hit the debt ceiling on Dec. 31, requiring Treasury to take “extraordinary measures." Those steps will allow the federal government to pay its bills for about two months.

That is a long way of making one major point. The fiscal cliff is not just one mountain but a series of hills that the country will face over and over again in the coming months. If you thought Washington acted in a dysfunctional manner now, give it a few more weeks. At this rate, the same drama will revive itself in time for Valentine's Day: another holiday for lawmakers to spend on Capitol Hill.

As the minutes ticked by toward midnight on Monday night, it seemed like the fiscal cliff drama would end in most anti-climatic of ways: A New Year’s Eve celebrated on the second floor of the Capitol building, among grumpy security guards, cafeteria workers, and journalists dressed in sequin tops that doubled as evening party wear.

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