Only 11 days remain for the U.S. Congress to act to avert a combination of tax hikes and spending cuts scheduled to hit the economy at the start of 2013. Following a week of negotiations with the House of Representatives Republican leadership, President Obama continues to Republicans to compromise.
House Speaker John Boehner's (R-Ohio) “Plan B,” which the House took up on Dec. 20, amounts to a $3.9 billion tax cut over the next decade, according to a Republican release touting new Joint Committee on Taxation research. Plan B extends Bush-era tax cuts on all income up to $1 million, and makes permanent a slew of other expiring tax cuts. The most expensive tax breaks—or the largest cuts—are permanent extensions of the estate tax, at current levels; capital gains and dividends taxes; and the $1,000 child credit.
Democratic leaders in the Senate have said the measure will not advance in their chamber, and the White House says Obama would veto it.
Republican leaders are adding a second bill that would reduce the deficit and avoid the sequester. The move gives Republicans the chance to vote for spending cuts at the same time they are being asked to raise taxes on the wealthy.
Various scenarios remain as to how this all could still play out before the new year, including the scope of any deal President Obama and congressional Republicans might reach by then. A grand bargain to cut the deficit by $4 trillion over 10 years – which would include compromises on both sides on spending and tax issues – was a long shot at the start of the lame-duck session, and it seems even more so now.
Worst-case scenario – that Obama and congressional Republicans remain deadlocked and do not reach any kind of bargain in time – is probably also the least likely. However, failure to extend the lowered income tax rates enacted under former President George W. Bush and prevent the $109 billion in automatic "sequester" spending cuts set to kick in on Jan. 2 is still a feared possibility, as many economists see the combination as something that would seriously harm the nation's already fragile economy.
The nation also faces the year-end expiration of unemployment insurance, the expansion of the alternative minimum tax (which would hit millions of middle- and upper-class families), and the expiration of the payroll-tax holiday that reduces a worker's Social Security taxes.
According to a letter written to the leaders of the House Ways and Means Committee and Senate Finance Committee by IRS Acting Commissioner Steven Miller, if Congress fails to patch the Alternative Minimum Tax (AMT) by year's end up to 100 million Americans could end up having to file their taxes late.
The AMT, an alternative tax measure used to ensure the wealthy pay a ‘fair share’ in taxes, does not automatically adjust with inflation, so nearly 30 million taxpayers would be ensnared by it next year unless Congress acts.
Kicking the can down the road is the most likely scenario, based on the belief that lawmakers still have no intention of letting the sequester cuts begin on Jan. 2 or letting all of the lowered tax rates expire. This idea could involve a plan to both compromise on tax rates and make a down payment worth just some targeted portion of the $109 billion in sequestration cuts, and then establish a framework for additional cuts. This would be much more of a temporary fix that pushes longer-term policy decisions to the next Congress, which already will have to do battle over an increase in the nation's debt limit.