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Congress Avoids Fiscal Cliff (for Now)

On Jan. 1, the House agreed to the Senate’s fiscal cliff solution, the American Taxpayer Relief Act (H.R. 8). The legislation prevents massive tax hikes for most Americans and delays across the board cuts to federal programs. President Obama signed the bill into law on Jan. 3.

The measure was approved with broad bipartisan support in the Senate, 89-8, but faced a challenging road in the House. Despite pleas for GOP support from Speaker John Boehner (R-Ohio), more than half of the Republican caucus voted against the measure because of inadequate spending cuts. Nonetheless, it was approved 257-167, with 151 of 236 Republicans voting “no.”

Sequestration Delayed

The bill delays the 8.1 percent automatic spending cuts until March 1. These reductions would be particularly damaging to the aviation sector, with the FAA’s $15.9 billion annual budget receiving a $1.04 billion slashing.

According to the Office of Management & Budget, the FAA’s ability to manage the nation’s airspace would be at risk and sequestration would likely only add to the existing certification and inspection backlog. While the agency is spared for now, the FAA budget remains at risk until lawmakers find a long-term solution

Permanent Tax Relief for Most Americans

The law includes several items designed to prevent a severe shock to the nation’s economy. Estimated to cost nearly $4 billion over ten years, the agreement permanently extends current income tax levels for those making less than $400,000 ($450,000 for taxpayers filing jointly). Similarly, current capital gains and dividend rates will also be extended for individuals earning below $400,000. The measure also provides a permanent fix to the Alternative Minimum Tax (AMT), sparing millions who would have otherwise been subject to the tax.

However, both income and capital gains rates will increase for those above the $400,000/$450,000 threshold (capital gains rise to 20 percent and income tax to 39.6 percent).

Though the law spared most from a substantial tax increase, the expiration of the 2010 two percent cut in the Social Security payroll tax will hit the majority of Americans. Consequently, according to the nonpartisan Tax Policy Center, 77 percent of households will face higher federal taxes in 2013.

Many family businesses are provided with greater certainty from the law, which includes a permanent resolution to the estate tax, which has fluctuated widely from year to year. The fix sets the tax at 40 percent with a $5 million exemption ($10 million for married couples), indexed to inflation.

Capital Investment Incentives Extended

The agreement also gives ARSA an important victory by extending 50 percent depreciation bonus through 2013, with the option to accelerate AMT credits in lieu of the depreciation bonus and allowing companies using PCM (percentage of completion method of accounting) to benefit from the capital investment incentive. It also includes a provision setting Sec. 179 expensing levels at $500,000 with a $2 million phase out through the end of the year.

Kicking the Can Down the Road

While the law avoids the fiscal cliff, it does not address the root causes of the nation’s unsustainable fiscal posture – it merely postpones the tough decisions on spending reductions and entitlement reform until a later date. With many lawmakers unhappy with the absence of substantial deficit reduction or spending cuts in the new law, the 113th Congress is already shaping up to feature contentious battles on federal spending.

Expect the sparks to fly in the push to raise the nation’s $16.4 trillion debt limit. While Treasury Secretary Timothy Geithner is taking steps to delay the need to immediately raise the limit, the issue will need to be addressed early in the 113th Congress.

As ARSA gears up for the important tax and spending debates to occur in the 113th Congress, be sure to stay tuned for important updates.

Click here to read a summary of the American Taxpayer Relief Act provided by the Senate Finance Committee.

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