The U.S. Senate, in a pre-dawn vote two hours after the deadline passed to avert automatic tax increases, overwhelmingly approved legislation on Tuesday that would allow tax rates to rise only on affluent Americans while temporarily suspending sweeping, across-the-board spending cuts.
The deal, worked out in furious negotiations between Vice-President Joe Biden and Republican Senate leader Mitch McConnell, passed 89-8, with three Democrats and five Republicans voting no. Although the proposal lost the support of some of the Senate’s most conservative members, the broad coalition that pushed the accord across the finish line could portend swift House passage as early as New Year’s Day.
Quick passage before the markets reopen on Wednesday would likely negate any economic damage from Tuesday’s breach of the so-called ‘fiscal cliff’ and largely spare the nation’s economy from the one-two punch of large tax increases and across-the-board military and domestic spending cuts in the New Year.
Mr. Biden, after meeting with leery Senate Democrats to sell the accord, said, “You surely shouldn’t predict how the House is going to vote. But I feel very, very good.’’
House Speaker John A. Boehner and the Republican House leadership said the House would “honour its commitment to consider the Senate agreement.’’ But, they added, “decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members and the American people have been able to review the legislation.’’
Even with that cautious assessment, Republican House aides said a vote on Tuesday was possible.
Under the agreement, tax rates would jump to 39.6 per cent from 35 per cent for individual incomes more than $400,000 and couples more than $450,000, while tax deductions and credits would start to be phased out on incomes as low as $250,000.
“Just last month Republicans in Congress said they would never agree to raise tax rates on the wealthiest Americans,’’ Mr. Obama said before the vote at a hastily arranged news briefing on Monday.Democrats also secured a full year’s extension of unemployment insurance without strings attached and without offsetting spending cuts, a $30 billion cost. But the 2-percentage point cut to the payroll tax that the president secured in late 2010 lapsed at midnight and will not be renewed.
In one final piece of the puzzle, negotiators agreed to put off $110 billion in across-the-board cuts to military and domestic programs for two months while broader deficit reduction talks continue. Those cuts begin to go into force Wednesday, and that deadline too might be missed before Congress approves the legislation.
To secure votes, Harry Reid, the Senate Democratic leader, also told Democrats the legislation would cancel a pending congressional pay raise.
The nature of the deal ensured that the running war between the White House and congressional Republicans on spending and taxes would continue at least until the spring.
Under the deal, tax rates on dividends and capital gains would also rise, to 20 from 15 per cent.
The deal would reinstate provisions to tax law, ended by the Bush tax cuts of 2001, that phase out personal exemptions and deductions for the affluent.
Those phaseouts, under the agreement, would begin at $250,000 for single people and $300,000 for couples.
The estate tax would also rise, but considerably less than Democrats had wanted. The value of estates more than $5 million would be taxed at 40 percent, up from the current 35 percent. Democrats had wanted a 45 percent rate on inheritances larger than $3.5 million.
