House and Senate Approve Fiscal Cliff Compromise

To the relief of many Americans, the House has approved a bill to avert the fiscal cliff, staving off widespread tax increases and deep spending cuts. In the 257 to 167 vote late Tuesday, 172 Democrats and 85 Republicans favored the bill, while 16 Democrats and 151 Republicans opposed it. The Democratic-led Senate had overwhelmingly approved the bill early Tuesday before passing it to the House.

The approved plan maintains tax cuts for individuals earning less than $400,000 per year and for couples earning less than $450,000. It will raise tax rates for those who make more, marking the first time since 1993 that federal income tax rates have gone up for any Americans. The bill also extends unemployment insurance and delays for two months a series of automatic cuts in federal spending. The legislation includes a wide range of favors for select industries, including tax breaks for restaurant and retail store improvements, as well as a provision allowing businesses to write off immediately half the value of new investments, known as 50 percent bonus depreciation. President Barack Obama said he would sign the bill into law, and the administration can begin planning for the changes immediately.

“The fact that they were able to compromise and get something done will give American consumers some peace of mind,” says Max Levy, buyer and product developer for iZone Group, a company that designs, manufactures and distributes UV3 Sunglasses. “There is a general understanding that there will be some stability with the new tax code. The economy is mostly about confidence, so, in general, independent retailers benefit when the American public has peace of mind.”

The legislation will raise roughly $600 billion in new revenues over 10 years, according to various estimates. According to the deal:

  • The tax rate for individuals making more than $400,000 and couples making more than $450,000 will rise from the current 35 percent to the Clinton-era rate of 39.6 percent.
  • Itemized deductions will be capped for individuals making $250,000 and for married couples making $300,000.
  • Taxes on inherited estates will go up to 40 percent from 35 percent.
  • Unemployment insurance will be extended for a year for two million people.
  • The alternative minimum tax, a perennial issue, will be permanently adjusted for inflation.
  • Child care, tuition and research and development tax credits will be renewed.
  • The “Doc Fix,” reimbursements for doctors who take Medicare patients, will continue, but it won’t be paid for out of the Obama administration’s signature health care law.

Despite the last-minute fiscal cliff agreements, Americans are still likely to see their paychecks shrink somewhat because of a separate battle over payroll taxes. The government temporarily lowered the payroll tax rate in 2011 from 6.2 to 4.2 percent to put more money in the pockets of Americans. That adjustment, which has cost about $120 billion each year, expired Monday. Now, Americans earning $30,000 a year will take home $50 less per month. Those earning $113,700 will lose $189.50 a month.

While the package provides some short-term certainty, it leaves a range of big issues unaddressed. It doesn’t mention the $16.4 trillion debt ceiling that the U.S. reached Monday. It also postpones cuts in federal spending that would have taken effect today and reduced the budgets of most agencies and programs by 8 to 10 percent. Come late February, Congress will have to tackle both these issues.

“This agreement might not be seen as perfect by everyone, but it gives American consumers and businesses the certainty they need to put worries over this issue behind them,” states Matthew Shay, head of the National Retail Federation.