12:56pm

Wed January 2, 2013
It's All Politics

Cliff Deal: What We Learned; What Comes Next

Originally published on Wed January 2, 2013 2:03 pm

The budget negotiations that led to a frantic New Year's deal on taxes confirmed many lessons about the way Washington works today.

For one thing, many of the most important relationships in the capitol appear to be broken. President Obama and House Speaker John Boehner led negotiations on a budget deal for most of the post-election period, but once again they came up empty.

The deal that passed, while significant and reassuring to financial markets, was brokered after Boehner and Obama stopped trying and others stepped in.

Also, the most common type of decision in Washington remains the postponed one. The final agreement did little to address the larger fiscal problems that lie ahead. The fiscal cliff was not so much avoided as rescheduled.

And while the vast majority of taxpayers were spared seeing their income tax rates go up, most working Americans will still be paying more than they have recently in the form of payroll taxes, which fund Social Security.

"Obviously, the government is not working," says former Democratic Rep. Lee Hamilton of Indiana. "The fiscal problems are not fundamentally going to be solved. Most things will be punted or postponed, which has been the characteristic of legislation for the last two years, certainly on fiscal issues."

Look To Your Leaders

The deal was passed by comfortable majorities in both chambers, particularly in the Senate, with bipartisan support. But it has still drawn criticism from left and right.

"It's a rotten deal," writes Nick Gillespie on the libertarian-leaning Reason.com. "The government has effectively kicked the can so far down the road that they've run out of road."

Hamilton, who now runs the Center on Congress at Indiana University, points out that legislating has become almost entirely a game of brinkmanship. A generation ago, major tax and budget packages were worked out over time through a considered committee process.

Now, the federal government has gone three years without even passing an annual budget. Instead, it's all last-minute negotiations — or, as retiring GOP Rep. Steven LaTourette of Ohio put it Tuesday, "We should not take a package put together by a bunch of octogenarians on New Year's Eve."

Actually, it was a pair of (barely) septuagenarians. Senate Minority Leader Mitch McConnell of Kentucky called on Vice President Biden, his former longtime colleague, after his talks with Senate Democratic leader Harry Reid of Nevada stalled out.

All that was after Boehner punted over to the Senate. He and Obama again found themselves unable to close on a deal, and Boehner couldn't even corral the votes to pass his own "Plan B" alternative, which would have spared more upper-income individuals from tax hikes, before Christmas.

It's All About Relationships

Biden and McConnell can take satisfaction from once again having saved the day. They pulled off the same sort of last-minute negotiation in 2011, in the midst of an impasse over raising the nation's debt ceiling limit (which set the stage for the fiscal cliff deadline).

"Biden did for the President on Capitol Hill what JFK was always too wary to let the experienced LBJ do for him," tweeted presidential historian Michael Beschloss.

But the fact that these two figures must keep coming to the rescue demonstrates how frayed relations are between the top players — including their nominal superiors in the White House and the Senate.

Boehner, who seems likely to be re-elected to the speakership on Thursday, was unable to persuade a majority of his own caucus — or even his leadership team — to support the final product.

"What is so striking about the fiscal cliff drama is that polarization seems also to have undermined the capacity of legislative leaders themselves to bargain and compromise behind closed doors," writes Sarah Binder, a Congress watcher at the Brookings Institution.

Plenty Left Undone

What played out as a last-minute, catastrophe-averting holiday vote turns out just to be the opening act of a new season of drama.

The Congress that is sworn in on Thursday will almost immediately have to turn its attention to spending cuts. The deal passed on New Year's Day was largely about tax rates and postponed a decision on automatic spending cuts, known as sequestration, for two months.

Sequestration was set to cut defense by about 9 percent and most domestic discretionary spending (meaning programs other than entitlements) by about 8 percent. There will still be some cuts to agencies, but the big decisions on whether to let full-scale, across-the-board cuts go through — or tackle spending in some other manner — have been put off, if only for a short while.

Negotiations about spending cuts will proceed within the context of once again having to raise the nation's debt ceiling. That's the statutory limit on the amount the government can borrow, which already tops $16 trillion.

The Treasury Department said it hit that limit on Monday. It can do some creative reshuffling of accounts to keep government operations running normally for several more weeks, but Congress will soon have to raise the ceiling again, certainly by sometime in March.

Congressional Republicans — angry about increases in spending included in the tax deal passed Tuesday — are bound to repeat their demand that any increase in the debt ceiling be offset by an equivalent amount of spending cuts.

Obama has said he won't negotiate over raising the debt ceiling, which is a way of paying obligations that have already been incurred. But given the potential damage to the nation's credit rating and the economy, some Democrats sound skeptical about his resolve.

The Bottom Line For Taxpayers

For all the uncertainty, for most people the latest deal reaffirms the status quo. Income tax rates remain at the same levels they've been at for a dozen years on incomes under $450,000 per household.

Most people will be paying less than they would have if there had been no deal at all and the Bush-era tax cuts had expired. After-tax income will be higher by 3.5 percent on average, according to the Tax Policy Center.

And upper-middle-income taxpayers are now spared the annual ritual of waiting for Congress to "patch" the alternative minimum tax, which had threatened to increase taxes for millions of people.

But working Americans will be paying more in payroll taxes. Rates on such taxes, which are split between employers and employees on incomes up to $113,700, will revert to the usual 6.2 percent rate, after two years at 4.2 percent.

Those who are not working can breathe a sigh of relief. Unemployment benefits will be extended beyond the 26 weeks provided by states, through the whole of 2013.

If they had not been extended, 2 million people would have had their benefits cut off this week, according to the National Employment Law Project.

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