Congress sidesteps cliff, postponing sequester
At the 13th hour, with a deal seemingly on the verge of collapse, the U.S. House of Representatives rallied to pass a deal preventing tax hikes for most Americans and postponing billions of dollars in spending cuts that were scheduled to take effect.
While the agreement was not the grand bargain sought by economists, the Obama administration and many in Congress, business leaders and stock markets collectively breathed a sigh of relief last week as the details of the accord became clear.
When the dust settled, 98 percent of Americans — individuals earning less than $400,000 annually and couples earning less than $450,000 — were spared from what would have been the largest tax hikes in U.S. history.
The result puts individuals and business owners — even those whose taxes are now set to rise — on sounder footing, said Mary Wall, senior vice president and wealth strategist of U.S. Trust, a wealth management subsidiary of Bank of America Corp. that caters primarily to high-net earners.
“In the past we had this looming cliff on the horizon where we knew taxes were going to change,” said Wall, who works out of U.S. Trust’s Stamford, Westport and Greenwich offices. “What this legislation has done is it has created some certainty. For a number of our clients it has increased their taxes, but the fact that we have certainty means people can really make more long-term plans.”
Pete Gioia, vice president and economist with the Connecticut Business & Industry Association (CBIA), said the agreement represents a first step, but that there are still numerous issues to be addressed by Congress.
“They’ve taken away a big chunk of uncertainty, but they still have left other chunks of uncertainty on the table,” Gioia said. “For businesses to make serious decisions for investment that are going to create the situations that lead to job creation, they need as much certainty as possible, and these people are playing politics with this uncertainty.”
That uncertainty, he said, centers on a two-month postponement of $109 billion in across-the-board spending cuts that were set to start impacting the Department of Defense and other federal agencies last week.
“Putting this off for two months I think unnecessarily creates uncertainty for companies that are either directly or indirectly impacted by defense,” Gioia said. “It shows that they (Congress) only partially got their job done.”
Under the bipartisan bill, which was approved by the Senate late in December and by the House on the evening of Jan. 1, earnings above $400,000 for individuals and above $450,000 for couples will be taxed at a rate of 39.6 percent, up from the current 35 percent rate.
Congress voted to extend Clinton-era caps on itemized deductions, to maintain the current estate tax exemption levels for individuals and couples while increasing the top estate tax rate to 40 percent from 35 percent, and to permanently index the alternative minimum tax (AMT) for inflation to prevent middle- and upper-middle income taxpayers from being hit with higher tax bills.
Additionally, taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families is set to increase to 20 percent from 15 percent.
Other tax changes include five-year extensions of the child tax credit, the earned income tax credit, and an up-to-$2,500 tax credit for college tuition; and one-year extensions of “bonus” depreciation of business investments in new property and equipment, a tax credit for research and development costs, a tax credit for renewable energy and jobless benefits for the long-term unemployed.
The bill blocks a 27 percent cut in Medicare payments to doctors for one year and restores the payroll tax to 6.2 percent from 4.2 percent, where it had been for the past two years.
Gioia noted that the immediate effect of the bill’s passage was to boost global bond markets — thus benefitting Connecticut exporters and importers — and to relieve global financial pressure that had built for months on fears that the U.S. would go over the proverbial cliff.
“For the first time since 2008, we’ve seen a major government bond market rally, not just here but around the world, and that is going to significantly reduce the amount of sovereign debt needed to refinance in 2013,” Gioia said. “This will certainly be positive news to anyone who is involved in exporting or importing, for that matter.”
David Mieczkowski, president of the Smaller Manufacturers Association of Connecticut Inc., said the fiscal cliff deal leaves manufacturers, who already operate on small profit margins, in a particularly vulnerable position.
With defense spending cuts figuring prominently in the sequester, “There’s a big concern for a lot of the smaller manufactures,” Mieczkowski said. “If Pratt and Whitney made cuts, then a hundred smaller manufactures would too. You’d see a trickledown effect that would be incredibly dramatic for Connecticut manufacturing.”
A representative of Stratford-based Sikorsky Aircraft Corp., the county’s largest employer and a subsidiary of Hartford-based United Technologies Corp., said the company was closely monitoring the possible defense cuts.
Rep. Jim Himes, a Greenwich Democrat, admitted the bill passed by Congress is a far cry from the sought-after grand bargain, but said he still believes a more comprehensive agreement on spending and entitlements is reachable.
“I voted for the bill and I was very pleased that we averted the fiscal cliff,” Himes said. “That said, it was a Band-Aid of a deal. For years now, I’ve been hopeful for a big deal that once and for all puts us on a stable fiscal trajectory, and this is a far cry from that.”
Himes said he thinks the momentum in global financial markets that marked the end of the 112th Congress can be maintained.
“I absolutely think it can be built upon,” he said. “I think that if we do what we should, which is tax reform and simplification to create a more competitive environment for our private sector, if we address the overhang associated with the long-term challenges to our entitlements, I think it could be a huge boost to everything from consumer sentiment to the investment attractiveness of the U.S.” to foreign markets.